In the third quarter of 2011, risky assets around the globe declined dramatically as investors’ appetite for risk evaporated. Investors’ uneasiness was fed by a number of uncertainties and ambiguities: mixed macroeconomic data coming out of the U.S. and China, the European debt crisis, and political ineptitude. In August, S&P downgraded the U.S. government’s bond rating for the first time ever, moving it down from AAA to AA+, and investors were left to ponder just how much risk there was to the U.S. "risk-free" rate. Adding another layer to all this uncertainty is the fact that it has been almost two years since the phrase "sovereign debt crisis" entered into the spotlight, yet an ultimate solution still seems elusive. Given all the repeated attempts at ending the crisis, investors seem to have reached a point where they really can’t say for certain when the crisis will end, so they’ve begun to severely discount the odds of a positive outcome. For long-term investors, there are signs of hope: after their dramatic decline, both U.S. and global equities are pricing in a potential recession, and they remain cheap according to relative value measures like P/E and earnings yield.
