by: Ryan Maroney, CFP®
Right now, you may be watching financial websites and wondering:
how badly will the headwinds from Greece rattle Wall Street this month?
So far, the damage has not been disastrous. The S&P 500 lost 2.09% on June 29; in the six market days that followed, it saw everything from a 1.7% descent to a couple of advances exceeding 0.6%. This volatility suggests that while Wall Street is certainly anxious, it is eyeing the situation in Greece with at least some degree of composure. (The selloff in Chinese stocks has also weighed heavily on global markets.)1
Greece has a very unpleasant choice to make: it can agree to a severe new bailout deal by July 12, or leave the European Union and contend with bankruptcy.2
It is coming down to a battle of wills. The EU desperately needs Greece to stay in the euro. A “Grexit” will send the message that EU membership is optional and reversible, hardly the signal the EU wants to send to its other debt-riddled members (Portugal, Italy, Spain). In the best outcome for the EU, Greek Prime Minister Alexis Tsipras and his Syriza party throw in the towel and capitulate to the demands of the new bailout – meaning more austerity cuts, humiliation for Tsipras, and the preservation of the eurozone ideal. Alternately, the situation could drag on for weeks with delays and re-negotiations.
Still, this appears to be a short-term headwind for U.S. equities. Stateside, fundamental indicators are much stronger than they were in the fall and winter. A new earnings season is underway, and it may provide big upside surprises. You could argue that two other headwinds affecting stocks – dollar strength and the gradual tightening of Federal Reserve monetary policy – have lessened somewhat, with the U.S. Dollar Index losing 2.92% in the second quarter and futures markets now betting that the Fed makes its first move with interest rates in December rather than September.3,4
Investors with long-term horizons should definitely stay the course here. If there is a “Grexit,” there are reasons to believe the U.S. markets could withstand the shock reasonably well.
Greece only accounts for 0.3% of the world economy to begin with, and its largest creditors are the European Union and International Monetary Fund, not private-sector banks. Foreign investment in Greek banks at the end of 2014 was 15% of what it had been four years earlier. Most Greek bonds are owned by other European countries.5
When investors respond to market moves with fear, they sell impulsively rather than rationally and set themselves up to buy high (and sell low) when conditions normalize. Any deal might send markets rallying in Europe, and that rally might turn into a global one, meaning you want to be invested when it occurs.
Whatever occurs in the next month, quarter or the balance of the year should not sway you from your retirement saving strategy or your long-term vision for building and enhancing wealth. Over the years, the equities markets will run through bull and bear cycles and experience all manner of upsets. In the big picture, selloffs, corrections, and even bear markets are short-term, and your investing is long-term. Headwinds arise, but they also cease. Do not be surprised if stocks ride through these Greek headwinds and gain momentum.
FMN financial advisors may be reached at 949-455-0300 or requests@fmncc.com
1 - investing.com/indices/us-spx-500-historical-data [7/8/15]
2 - usatoday.com/story/money/2015/07/07/greece-eurozone-meeting/29804091/ [7/7/15]
3 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [7/5/15]
4 - washingtonpost.com/blogs/wonkblog/wp/2015/06/17/federal-reserve-rate-hike-likely-before-year-end/ [6/17/15]
5 - money.cnn.com/2015/07/05/investing/what-to-expect-market-greece-vote/ [7/5/15]