Whether it is the economy or the markets, it is difficult these days not to have that sinking feeling. The feeling is almost like being stuck in quicksand or a bog. Instead of having a fallen branch or vine to help you get out of your predicament, the only thing available you can grab is a boulder that would drag you farther down.

Last week, the release of the third quarter Gross Domestic Product (GDP) growth estimate showed how much government infrastructure spending was driving our economic growth. The decision to halt public construction in lieu of the revelations surrounding the systemic corruption in flood control projects resulted in GDP growth slowing to an unexpected 4.0 percent for the quarter. With the recent typhoons, and assuming no change in fiscal spending, it is likely going to get worse in the fourth quarter.

The corruption drama took another twist last Friday when former congressman Zaldy Co, a key politician implicated in the mess and currently abroad, accused the head honchos of government of giving orders to insert P100 billion into the budget. The accusation itself was not made under oath, and unlike other reports, was only done via a video post instead of face-to-face before members of Congress. Meanwhile, the Senate Blue Ribbon Committee has resumed its investigation into the matter.

Coincidentally, the Philippine Stock Exchange Index (PSEI) dropped another 2.5 percent on the same day of the reported accusation to end at 5,584, its lowest level in five years. We also saw a net foreign selling of approximately US$1.8 million on Friday. The market is asking, is the drop related to the new information from the Senate and Co’s accusation? There may be fundamental factors that are also at play.

For one, the implications of a weak outlook for the GDP in the next few quarters is being digested by the market. Alongside that is the conclusion of the earnings season, which saw many disappointments and an overall low-single digit estimate for earnings growth of the PSEI for the third quarter.

And it is not just the Philippines we should be looking at. Outside, concerns are rising over extended valuations in the US equity markets. Much of the increase in valuations has been attributed to artificial intelligence (AI)-related stocks, particularly the so-called Magnificent Seven. Given their valuations, the question being asked is whether the expected returns to justify them are still reasonable. As a global market, sudden changes in the US can reverberate across the globe as the Global Financial Crisis (GFC) had painfully taught us.

This sinking feeling often leads to a market capitulation, which is really part of the cycle where investors who represent the strong hands (long-term risk averse) eventually transfer to those who are considered the weak hands (short-term risk takers). While there is opportunity during these phases, the timing is always key. The wrong timing can be painful.

Outside markets, capitulation on the economy leads to enhanced diaspora of the people and a rush to diversify assets both in terms of geography and type/class. This is the main reason we need to have a serious conversation about the nation. You may allow some capitulation in the markets but you can never allow capitulation in the economy. If there is any benefit from a crisis, it spurs real heroes (and/or anti-heroes) to emerge and lead the recovery and restoration.