Global Stocks in the 1st Quarter: The Poorest in Years

In the first quarter of this year the Dow Jones World Index (excluding the US) fell 8.7% in dollar terms while the Industrial average dropped 7.6%. It is clear that the US economic crisis has had a widespread global impact; interesting since in past years foreign markets have managed to remain relatively unscathed during times of economic hardship in the US.

So, why now have foreign markets been so dramatically affected by the recent poor performance of US? The ripple effect shows how distant markets have become increasingly interconnected in recent years. When one market experiences a slow down, chances are most others will feel it too.

Some of the worst hit have been India and China, whom last year had experienced considerable growth, now have shares down in both countries by more than 20%. It comes then as no surprise that Japan, whose economy slowed down last year, has shares falling by 18%. Even European economies as well the emerging markets that had been performing so well last year have experienced similar declines.

There does remain a strong forecast for positive growth in the World Economy. The IMF expects a 4.1% expansion this year and 6.9% for developing countries. However, most investors have not been relieved by these projections, questioning if this increased correlation between international markets could act as an avenue for the spread of economic slowdown throughout the global market, especially if there is a US recession.

Also, the continued weakening of the dollar has caused problems for foreign countries in many ways. For example just this year the dollar has dropped 10.5% against the yen. For the Japanese this has meant their exports are more expensive in dollars and therefore have become less competitive. Europe has experienced similar woes as worries increase that they more powerful euro will impact the ability of companies to compete against less expensive foreign goods.