This painful correction is also a necessity

Global stock prices have become bloated as a result of cheap-money policies followed by central banks

There is no need to panic. The global sell-off in equity markets, which has wiped out billions of dollars in investments in just under a week, was expected and is necessary for the world to finally put the global financial crisis of 2008 behind us. What we are seeing now is a likely correction — albeit a massive, painful one — that was long overdue.

What is important to remember is that the global economy is doing well, companies are posting solid results and even information about employment levels are looking good. That is — unfortunately — the problem. Markets have been benefiting from the economic recovery measures taken by central banks for too long. They are now undergoing a painful switch back to normality.

Since the crash of 2008, markets have enjoyed the United States Federal Reserve’s cheap-money policy. For the last seven years, equity markets have soared. Stock prices are almost 19 times that of earnings, indicating this was one of the most over-valued markets ever. To sustain those low-interest rates, the central bankers were forced to support the bond markets. But the improving global economy is also bringing with it the prospect of inflation, which will force central banks to hike interest rates quickly and continue to withdraw their support from bonds. Investors, suddenly faced with this change in direction from central banks and painfully aware that more stable investments will soon come on to the market, are now rapidly dumping their overheated stocks.

While this rapid sell-off is painful, what comes after will likely be a healthy, stable market that can be sustained without central bank support. The goal now should be to ensure that investor greed is never again allowed to create a market crisis similar to the one in 2008 that needed such a massive bailout.