As share prices tumbled yesterday, an e-mail arrived from the bearish bank chairman who took all his family’s money out of equities and was quoted here earlier this week warning of trouble ahead in the stock market. It read: “Footsie now 5 per cent off peak. QED.” And, at that point, the market had about another 100 points to fall.

The long awaited correction came yesterday, as the stock market suffered its worst one-day fall in four years. The FTSE 100 slid 3.2 per cent, as all but three stocks in the index sank. The London market is down 5.6 per cent in three days, just over 7 per cent this month. This is not yet a stock market crash – that is typically a 10 per cent slide – but it is beginning to look that way.

The question now is whether the correction continues.

The bull run of the past four years has been sustained by unprecedented liquidity. Unlike previous booms, these flows of money have been sustained by unprecedented leverage. From hedge funds playing merger arbitrage to buyouts pegged on debt to operating profit ratios approaching double digits and private investors discovering the fantastic gearing that punting through contracts for difference can bring, the stock market has been held up by borrowing like never before.

The anxiety in debt markets has inevitably taken hold in equities. The failures in the sub-prime market prompted investors in all kinds of debt to reconsider both the security and the price of their loans. Many have simply stopped lending. This, in turn, has forced private equity bidders to renegotiate the terms of several big buyouts. The purchase of Cadbury’s drinks business, the EMI music business, Chrysler cars and Alliance Boots looked almost effortless a few weeks ago. They are more troubled now. As big acquisitions stall, the expectations of future bids for a clutch of companies have faded. To be sure, corporate earnings remain robust. The macroeconomic outlook is good. The market jitters have made it a little less of a certainty that we will see another interest rate rise this year. There are many reasons for long-term faith in continued economic growth and rising prices.

But, these are times when the markets are best appreciated as a spectator sport. There are questions about whether the credit crunch in the leveraged buyout market will spread to corporate debt. Investors are aware that gearing can work both ways. Falling equity prices can create margin calls, prompting a downward spiral. And at such times, the scramble for safety – into bonds, yen, cash – can prove a self-fulfilling prophecy.

Suddenly, confidence is in much shorter supply.

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