Good afternoon. The ASX fell off a cliff this morning. Shares plunged 5% at the open and as of midday showed little sign of lifting off the bottom. Local shares followed the lead of America’s heavyweight S&P 500, which dropped 3.9% overnight and officially crossed into bear market territory.

Markets are reacting to mounting fears the Federal Reserve will tip the US economy into a recession in its battle to curb inflation. Traders are now betting the world’s most important central bank will further accelerate its rate hike schedule after data on Friday showed US inflation accelerated again in May.

Vicious selloffs are spreading through riskier assets. The Nasdaq Composite is down 8% since Friday. The world’s largest cryptocurrency Bitcoin has shed 26% over the past five days as major cryptocurrency lender Celsius halted withdrawals on Monday due to “extreme market conditions”.

Traditional safe haven government bonds are reeling too. The yield on 2 year Australian government bonds exploded out to 3.05% just after midday as investors ditched the interest rate sensitive instruments. Pain extended along the curve with the yield on 10 year Australian government bonds rising to 3.97%. Yields rise as prices fall.

Global markets are falling as investors grapple with a toxic cocktail of stubborn inflation, rising rates, decelerating growth, and record commodity prices all spurred on by the lingering effects of the pandemic and Russia’s invasion of Ukraine.

What could happen next and how should long-term investors respond? We’ve collected answers to these questions and more below.

 

How did we get here?

A speculative boom in part fuelled by the low interest rates and government support designed to insulate economies from the worst of the pandemic.

Central banks underestimated the pace and stickiness of inflation and are raising rates faster and further than most expected amid worrying signs of decelerating growth.

Inflation is proving far trickier to contain in part because energy prices are exploding (and that’s not just because of Russia).

What could happen next?

Morningstar’s Peter Warnes thinks markets have further to fall. Mark Lamonica agrees.

The doomsday scenario for many is stagflation, a period of high inflation and slow growth not seen since the 1970s.

However, some argue the Australian share market could be a relative outperformer.

What should I do now?

Tune out the stock shillers and revisit your approach to investing.

Revisit our down-market guides for retirees, pre-retirees and those under 40.

Check out our 8-step bear market survival guide.

Where do the opportunities lie?

For those looking for safety, we’ve reviewed the best term deposits and savings accounts on offer.

Many high-quality US companies are trading at major discounts to fair value.

Seven local dividend picks with moats are trading at big discounts to fair value.