MARKET TUMULT CHARTS NEW WATERS

Fears are rampant and emotions high as selling begets selling in a financial world filled with unknowns

The persistent pounding global stock markets are taking seems to be taking on a more sinister tone and more dangerous phase, with emotions and fear taking on a bigger role in the rout, investors questioning the ability of the world’s central bankers to calm the market’s frayed nerves and a volatile environment in which selling begets more selling.

At the moment, the world’s stock markets are stuck in a negative feedback loop, in which one part of the globe, sparked by growth fears, sinking oil prices, interest rate confusion and — yes, falling stock prices — is spreading to other places, causing a market-specific type of contagion that causes a self-fulfilling prophecy of ever-lower stock prices.

Indeed, what started out as a sell-off in the energy patch has spread to the key financial sector and once-high-flying tech sector.

“We’re at the stage when fear begets more fear,” says Nick Sargen at Fort Washington Investment Advisors.

Adds Brad McMillan, chief investment officer for Commonwealth Financial Network, “We are moving from a sell-off based on broad general fears, such as a Chinese slowdown, to one based on some specific and credible fears around the European banking system.”

The financial pain is adding up. The Dow Jones industrials cratered another 255 points Thurs- day and is now down 10.1% for the year and 14.5% from its record high in May. The Nasdaq composite, after Thursday’s 0.4%

The main fear today is that we’re in unchartered waters, with the U.S. and global economy slowing while the major central banks have interest rates at or near zero.”

Nick Sargen, senior investment adviser at Fort Washington Investment Advisors

drop, is now down 18.2% from its July 2015 peak and nearing a bear market, or drop of 20% or more.

European banks have gotten pounded this week on worries that bad loans, low profits, stresses in credit markets and slow growth around the globe have made them vulnerable.

The sell-off in U.S. shares is based on the fear that a recession is coming, even though job growth is robust, housing is solid and consumers continue to spend.

Wall Street is basically pricing in a recession that might not even happen.

There’s also growing fear that a big backstop for markets since the last financial crisis in 2008 — the world’s central banks — have little fresh ammunition to fight the latest firestorm in financial markets.

Two days of testimony before lawmakers by Federal Reserve Chair Janet Yellen has done little to soothe the frayed nerves of investors around the world.

Yellen, while noting the potential risks to the U.S. economy from the recent market turbulence and lower growth trajectory of the global economy, says it is too early to say these headwinds will have a major adverse impact on the U.S. economy.

That message has created confusion as to whether the Fed will continue with the interest rate hike cycle it started in mid-December with a quarter-point hike that took rates off zero.

Wall Street is starting to price assets based on the underlying strength of the business or economy, as opposed to simply hoping the Federal Reserve or other central banks will ride to the rescue. In short, the market is re-rating the market’s price-to-earnings multiple downward.

When investor decisions are dominated by emotions, even stocks not massively affected by negative trends get crushed.

“When emotions overtake reason, behavior becomes bizarre,” says David Kotok, chief investment officer at Cumberland Advisors. “Fear is rampant. So fundamentals (or things like sales, earnings and market position) mean nothing.”

If there’s a silver lining, Kotok adds, it is that the fear-based selling and jump in irrational pessimism could be signaling that this wretched period for markets is transitory.

“This is temporary and marks the capitulation stage,” he says. “Panic intensifies.”

There also is a sense investors no longer view big market price dips as a good entry point, as they see few catalysts at the moment to drive stock prices higher.

“Some people that were ‘forced’ into stocks due to low interest rates are throwing in the towel,” says Bill Hornbarger, chief investment strategist at Moneta Group.

Still, despite the flight from risk in financial markets, Hornbarger says it “feels much more orderly than (market meltdowns in) 2008 and 2000, and there isn’t the panic and other disruptions we saw then as of yet.”