Just when financial markets found some solace in Britain’s banking-sector bailout, along comes recession to rock the boat.

Writing in The Sunday Times last week, Warren Buffett — hailed as the world’s greatest investor — told of how he was pouring his personal wealth into the stock market. But was he right? Things are looking pretty shaky.

The FTSE 100 lost 180 points, tumbling to 3,883 yesterday, after gross domestic product fell into negative territory. A negative figure had been widely anticipated but the sheer size of the drop shocked markets.

The country’s economy sank 0.5% in the third quarter of 2008 — a drop more than twice as severe as the 0.2% expected. “It’s a big shock that the decline is as large as 0.5%. It’s truly dire,” said Philip Shaw at Investec.

Traders’ screens turned red: in early trading only one stock — Friends Provident — was in positive territory. It soon succumbed to the vagaries of the wider market, and ended the day down 17%.

The losses wiped out earlier gains: the FTSE had notched up 1.2% on Tuesday. Overall, the index lost 5% last week and is down a staggering 37% in the past year.

“My comment to traders was dive, dive, dive,” said Brian Hilliard at Société Générale. Indeed, investors continued to dive for cover, selling stocks and high-yielding currencies in favour of safer assets. That sent the pound to a six-year low of just over $1.50.

Is there anywhere to hide? The knock-on effects of what’s happening in the banking sector and wider economy are far-reaching. Those who have with-profits endowments, bonds and pensions are facing stringent exit penalties. The outlook for the beleaguered sector — subject to bonus cuts and tumbling payouts in recent years — remains bleak.

The value knocked off the country’s largest 200 final-salary pension funds broke through the £100 billion mark: they have lost a total of £110 billion, falling to £370 billion from a peak of £480 billion in October last year.

Emerging markets — traditionally thought to decouple from the US in tough times — have suffered, too. The MSCI Emerging Markets index hit a four-year low yesterday. It has lost more than half of its value over the last year, falling 56% since October 2007.

“There’s continued risk aversion, which is hitting emerging markets, and there’s a flight to safe havens like the yen,” said Jeremy Batstone-Carr at the broker Charles Stanley.

Bonds, too, are becoming a not-so-safe option. Since the onslaught of the credit crunch, prices have plummeted as the cost of company borrowing spiralled and credit markets dried up. That sent yields soaring.

In the past month, though, corporate-bond funds have fallen off a cliff. A total of 16 corporate-bond funds are showing double-digit falls over the past month, the ratings agency Morningstar said.

Old Mutual Dynamic Bond fund — which had defunct investment bank Lehman as its third-largest holding — has lost more than 35% in the past year, Trustnet data show.

New Star Extra High Yield Bond, which has just over 82% in sub-investment grade bonds in a bid to shoot for high returns, is down almost 34% in the past 12 months.

The government’s multi-billion-pound injection into Britain’s banks — a total of £37 billion into Royal Bank of Scotland, Lloyds TSB and Halifax — should make markets more liquid, restoring some confidence and helping bond values. Now could be a good time to buy, before prices rise, driving down yields — and annuity rates.

Amid the gloom, Tilney’s Peter Bickley — an investment-industry veteran with almost 40 years’ experience — effectively called the bottom of the stock market. “Sentiment is shattered; equities have no friends,” he wrote in his latest Viewpoint. “The job of this Viewpoint is to thump the table: the madness is over, we are back on familiar turf and the usual rules apply. If equities have no friends it’s usually right to be buying — I am — even if there may be more squalls ahead.”

Fortune favours the brave. But while Bickley and Buffett might be buying, it’s hard to see how we’re “back on familiar turf”.

The global downturn is only just beginning — and is poised to get worse before it gets better. Rattled banks will take some time to recover their nerve, and are unlikely to resume normal lending anytime soon.

So far, only $600 billion (£381 billion) has been written off in bad debts — less than half the $1.7 trillion expected by Bank Credit Analyst. While there might be bargains to be had — in well-capitalised, defensive-sector businesses unjustly punished — the madness is far from over.

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