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The Three Fears Sinking Global Markets

Nothing about the condition of the world economy suggests that a major slowdown or recession is inevitable or even likely. But a lethal combination of self-fulfilling expectations and policy errors could cause economic reality to bend to the dismal mood prevailing in financial markets.

LONDON – January is usually expected to be a good month for stock markets, with new money gushing into investment funds, while tax-related selling abates at the end of the year. Although the data on investment returns in the United States actually show that January profits have historically been on only slightly better than the monthly norm, the widespread belief in a bullish “January effect” has made the weakness of stock markets around the world this year all the more shocking.

But the pessimists have a point, even if they sometimes overstate the January magic. According to statisticians at Reuters, this year started with Wall Street’s biggest first-week fall in over a century, and the 8% monthly decline in the MSCI world index made January’s performance worse than 96% of the months on record. So, just how worried about the world economy should we be?

Three fears now seem to be influencing market psychology: China, oil and the fear of a US or global recession.

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