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Those short of confidence need to be constantly told they’re doing great. It seems that equity and commodity markets since March shared a similarly nervous disposition. While prices were going up, investors strutted. Yes the economic news is horrible, but it is less horrendous than last month! As with all fragile types, however, barely a scratch has sent them wailing like children.

How else to explain the reaction to such a mild fall in markets since last week? The S&P 500, having rebounded by more than a third, is off only 6 per cent. Emerging markets are down less than 10 per cent, after almost doubling. Real bulls would not drop their horns at such moves. The very fact that so many are asking whether this is the end of the rally is proof of how few believed in it in the first place.

What to make of it all? There is little doubt that equity markets got ahead of themselves. According to Smithers & Co, for example, the cyclically-adjusted price earnings ratio for the S&P 500 was 15 per cent above fair value before this correction. Commodity prices were rising as much because of strategic hoarding as they were thanks to hopes of recovery. And bond yields, now falling again, were overly worried about inflation.

One mistake, however, would be to believe that a correction in commodity prices and interest rates are entirely reason to celebrate. They may indeed offer short term relief, having threatened to kill off the recovery before it began. But if the trend catches hold it could presage a nasty economic future: perhaps a Japanese-style period of falling prices and depressed demand. That scenario remains distinctly possible. Consumers remain overleveraged and the houses they live in are still falling in value. Companies around the world will benefit again this quarter from cost control. But profits everywhere are still down on last year and cuts cannot be found forever. US profit margins, for example, are around their 50-year average. Investors are increasingly nervous. They should never have been anything but.

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