Stock markets in the US and other developed countries are being plunged into chaos after traders dumped stocks and bonds on a “toxic” market, as fears grow that a new global pandemic could trigger a new economic crisis.
The crisis, which began on Sunday, has spread to Asia, Europe and even the US, with some analysts predicting a crash.
The market crash was caused by a spike in the value of the so-called black-market index, or BIS, the main index of global stocks.
The index, which measures the value that investors can place on individual stocks, plunged almost 20% to below $50 a share in the last 24 hours on Monday.
While the BIS is not the only benchmark used to value companies, it is often used as a proxy for the broader market.
But it is also vulnerable to volatility because it has been based on a flawed assumption about the cost of equity investments.
While many stocks have been valued by the Bis at $100 a share or less, a lot more are priced at $50 or more.
This could be because investors are overestimating the value they can expect to earn from their investment, the New York Fed’s James Surowiecki, a professor of economics at the University of Missouri, told the Financial Times.
“We are at a point in time where stocks are being priced at a level that has never been seen before in the history of the market,” Mr Surowiescki said.
“The market cap of the Bands is now in excess of $700 trillion, the most recent data points show.”
The index’s valuation was based on the assumption that a $50 investment in a company is worth $1.50.
But since the stock market was already valued at around $1,000 a share, investors were able to make a profit.
The value of a company’s shares is determined by a number of factors, including its market capitalisation and share price.
For example, if shares are priced by the market at $1 in the past, they are likely to trade at a price of $1 and are therefore more valuable than those in the market below that level.
However, Mr Surowski said, the market price for a company was determined by its market cap, and so investors’ returns were inflated by a factor of at least 50%.
The US market, for example, has an average market cap that is about $8.3 trillion.
Mr Surowscik said it was a “horrendous” situation that could have dire consequences for investors’ money if the stock crash continued.
“You can’t just dump stocks on a toxic market,” he said.
Investors are also selling stocks on other marketplaces, such as the futures market, which is the biggest in the world, and ETFs, which are used to invest in companies.
The BIS currently values about $4 trillion of assets in the global market.
According to the Banc of America, a broker, about one in every five US households has a brokerage account with the US exchange.
On Monday, the BAS said that investors who had a brokerage or mutual fund account in the BICS index could continue to make deposits in the index, although they would no longer be able to sell those funds on the stock markets.
Despite the current panic, the index is still a strong performer, with prices above $50 in some cases.
But Mr Suowski said that a lot of investors are not being able to keep their money in the stocks.
“They are taking their money out of the index because the index has been overvalued,” he told the FT.
“I don’t know why.”
The collapse of the markets is also affecting the world’s banking system.
“If the index does not rebound by the end of this week, the banks will have to take a haircut on their capital, which means they will have less liquidity,” Mr Srowiecky said.
This is not a new problem for the US economy.
US President Donald Trump is warning that the global economy will be in “tatters” if the US doesn’t rein in the Federal Reserve and rein in its massive bond buying programme.
The US Federal Reserve was forced to take extraordinary measures last year to prop up the economy and help spur economic growth.
What the market is saying about the stocks and the crisis on the NYSE and other exchanges in the pic.twitter.com/gQs3T0jDvT — Tom Breen (@TomBreen) September 25, 2019 “I would not be surprised to see the Fed take more measures to prop the economy up,” said Mike Siegel, chief investment officer at BK Private Wealth Management in Manhattan.
The stock market’s crash has sparked fears that the market will collapse if it is not rescued by governments.
“It’s not like we’re just sitting on our hands and hoping the Fed does something,” Mr Kress said.