Uncertainty has finally caught up with equity markets around the world - and we shouldn't be surprised. At the beginning of the year, most investors were optimistic about the outlook, partly as a result of the quantitative easing begun by the US Federal Reserve in the fourth quarter of last year.
Much of the liquidity that poured into the system found its way into financial assets, rather than the real economy.
Even though several events that would be considered negative for equities took place in the first four months of the year, the indexes moved higher.
Markets were able to withstand the magnitude 9 earthquake in Japan and the resultant tsunami; the Fukushima Daiichi nuclear accident and related manufacturing disruptions; floods in Australia; severe winter weather in the US; regime changes in Egypt and Tunisia; and civil war in Libya.
There was also a sharp rise in oil and other commodity prices, with major credit problems in Greece and Portugal again casting doubt on the viability of the EU and the euro, the possibility of a government shutdown as a result of the US hitting the debt ceiling, and an inability of Congress to reach a compromise on cuts in the federal budget.
Finally, however, the optimism began to wane.
The current market pullback was inevitable and is not indicative of a reversal of the positive move in equities that began last September.
I still believe the basic underlying fundamentals are constructive.
There are three principal factors driving the growth: exports; capital spending; and the consumer. They are still in place, although perhaps not as robust as they were a few months ago.
The negatives are well known: the rise in the price of oil has drained some consumer spending capacity; unemployment rates are worrying; and the tightening of credit in emerging markets to dampen virulent inflation has diminished demand for imports. With good reason, investors are unsettled.
The turbulence in the Middle East and North Africa (Mena) also confused investors. Oil production in Libya has stopped and the world no longer has access to the 1.5 million barrels a day that were being produced there.
Events in Europe and the Mena region have driven investors to look for low-risk places to put their money.
The credit situation in Europe is clearly worsening, and the real risk is that commercial banks may be vulnerable if weaker countries default on their sovereign debt.
Even if one or more of the smaller countries does go through a debt restructuring, I think the EU and the euro will survive.
It appears that the manufacturing situation in Japan is improving. Japan is no longer a major contributor to world growth, but it is an important component supplier, and a return to normal manufacturing output is an important development.
Another persistent worry is that the Chinese economy is in the midst of an economic bubble that is sure to come to an unfortunate end. The Chinese economy has many problems, but the basic strength results from growing consumerism and we should continue to see impressive growth for several more years, at least.
Overall, I think the world economy continues on a modest growth path. The developed economies should expand at a real rate of 2 per cent and the developing economies at 5 per cent or better.
The rise in initial unemployment claims, some weak reports from regional Federal Reserve districts, mixed housing data and the disappointing durable goods report have many observers worried that the economy is seriously slowing.
Many economic observers are reducing their estimates of US economic growth for the remainder of the year.
This may be what is needed to change optimistic investor sentiment to serious concern, and that could form the platform for a better market after the summer.
Byron Wien is the vice president at Blackstone Group
