Worries about inflation have made the investing climate suddenly riskier around the world, but a widespread bear market is being kept at bay.
That's because the global economy continues to show solid growth, analysts say. Yet recent stock market turmoil, particularly in hot emerging markets such as India and Brazil, signal an environment that can bring quick penalties for investors.
Emerging markets, soaring for several years as they lured a torrent of global cash, have reversed course the past two weeks. In the US, the Dow Jones Industrial Average began the week down 4 percent from its six-year high of 11,642.65, which the index reached on May 10. European exchanges have also fallen in the past two weeks.
"The markets have woken up to the fact that interest rates are going to go up more than they were expecting - especially in the US," says Nariman Behravesh, chief economist at Global Insight, an economic consulting firm in Lexington, Mass. That, in turn, could mean slower economic growth from Hamburg to Hong Kong.
Although the impact is global, he says, it is magnified in emerging markets such as those in Asia and Latin America. Because they had been the locus of investor enthusiasm, they face the prospect of the sharpest pullback. "It's the emerging markets that are a little dicey."
That pattern was evident Tuesday. Many Asian markets fell further, extending a string of recent losses, while investors found firmer footing in the US and Europe. Exchanges in France, Germany, and Britain all rebounded with gains of more than 2 percent, and shares rose in New York during morning trading.
Commodity prices have joined interest rates as a driving force in recent days. Declines in the price of metals and other raw materials - a possible harbinger of slowing economic growth - pose a particu- lar threat to the resource-based economies of many developing nations.
Tuesday, firmer prices for commodities including oil helped some emerging markets stem their losses.
Although the mood on world markets is more sober, analysts say it's still a long way from a bear market, typically defined as a 20 percent loss of value that can last for a long or short time.
"Emerging markets and the commodities markets will continue to be very volatile" for several months, predicts Michael Cosgrove, who publishes a capital-markets newsletter, The Econoclast, in Dallas. But for long-term investors, he says, the best strategy may be simply to ride out the storm.
"You're probably better off just sticking it out," rather than selling on the hunch that deeper declines may be coming.
That's because, in the long run, the so-called emerging markets still promise strong growth, based on rapid development and globalization. And in the short run, they are financially much more stable than they were in 1997, when a Russian debt default triggered a severe sell-off in developing nations.
Today those nations have less debt owed to foreigners, a greater cushion of currency reserves such as US dollars, and better exchange-rate policies.
But the recent turmoil is putting these new realities to a severe test nonetheless. India is a case in point, where Finance Minister P. Chidambaram fended off calls for his resignation and appealed for calm.
"Ordinary investors need not worry as fundamentals of the economy are strong," Mr. Chidambaram told lawmakers.
In both emerging markets and in the world's major economies, what's happened in the past two weeks is a reappraisal of risk. That reappraisal, naturally, is most punishing in the places where euphoria had most abounded.
India's boom, for example, began to resemble America's dotcom bubble of the late 1990s, with a construction boom in India's high-tech hubs.
"It was like a casino market. I've felt for a while that the market was overstretched," says Ramesh Damani, a stock broker in India.
For several years, low interest rates globally have provided cheap credit and spurred a quest for higher-yielding investments. From hedge funds to shares of Brazilian banks, investors have taken on more risks in the hopes of higher returns. And often they have borrowed in places such as Japan to do it.
The cycle has turned toward tighter monetary policies in Japan, Europe, and the US. It's unclear how far the tightening will go, but as long as it persists it will exert a slowing force on the global economy. World output could grow by nearly 4 percent this year, forecasters predict.
In the US, the Federal Reserve under new Chairman Ben Bernanke is feeling pressed to show it is squelching inflationary pressures. Some fear that could mean more interest-rate hikes than are really needed.
"We may be nearer the point where the Fed might induce a significant slowdown," says Dr. Cosgrove. He sees global stock markets entering an uncertain "sideways" phase for several months.
• Staff writer Scott Baldauf contributed to this report from India.