Well,
it has for me anyway. Hopefully you’ve
been enjoying the warm weather, soaking up some sun, and spending time outside. But for those of us tasked with keeping track
of the markets, June has been a crazy month, indeed. In fact, even my most outdoorsy clients are
noticing. A lot of people have asked me:
“What’s up with the markets—why all the volatility lately? What’s going on in Europe? Should I be worried?”
Well,
wonder no further. By the time we get to
the end of this letter, you’ll be up-to-date.
Market Volatility
Let’s
start with the main subject on every investor’s mind. The most recent burst of volatility started
in May with the S&P 500® falling 127 points from May 1st
to June 1st, while the Dow® dropped over 1,000 points in
the same period. Since then, the Dow has
risen over 600 points higher, and the S&P over 60, but we’re still nowhere
near the highs we saw a few months ago.
And in the past month alone, we’ve seen our share of individual peaks
and valleys.
So
that’s what happened. Now, here are some
of the reasons why.
Same Old Problems from the Same Old
World
Two
of the major players in this game of economic roulette are countries that once
ruled the western world: Greece and Spain.
Greece has been mired in debt for years, and has enjoyed (or suffered,
depending on your point of view) several massive bailouts, courtesy of its
larger European Union brethren. To put
it simply, the longer Greece is a burden on the rest of the continent, the
longer there will be unease about investing in Europe as a whole. That’s because if Greece’s economy fails,
other countries could fail, too.
Remember, the EU is primarily an economic
union. Not only do most of its
members share the same currency, but also the same regulations and
obligations. If Greece’s economy were to
fail, it would not be able to meet obligations to its neighbors, thus making it
harder for those countries to pay their debts. The EU’s response has been in the form of
bailouts and austerity measures. Whether
you agree with these things or not, the EU has clearly decided to implement
short-term fixes to keep the worst from happening.
On
top of this Greek tragedy has been a new Greek drama—their national
election. After the most recent
austerity measures in February, the population voted to elect a new
government. Two parties vied for
control—the New Democracy Party and Syriza.
It was the latter that has been giving the markets an ulcer. If Syriza had won the election, they would
have ended the austerity measures, left the European Union, and dropped the
Euro in favor of their old currency.
Most importantly, it would have meant Greece defaulted on its
loans. We’ve already covered what would
happen then.
But
on Sunday, June 17th, 2012 the news broke that the New Democracy
Party won.1 They didn’t win
by a wide enough margin to govern Greece entirely, meaning they’ll have to form
a coalition with their rivals, but at least it means Greece will be staying in
the EU for now. The news caused a brief
rally in the markets, but it remains to be seen if that rally will continue. At the very least, Greece can take comfort in
the fact that their national soccer team reached the quarterfinals of the
European Championships.2 No
doubt that will solve everything.3
Spain Replaces Running of the Bulls
with Running of the Bears
So
the forecast for Greece right now is partly cloudy with a chance of rain. That seems downright sunny when you compare
it to Spain, who has been undergoing a debt crisis of their own. In short, Spain has asked the EU for a €100 billion bailout4,
mainly to help recapitalize their failing banks. But Spain is also in a recession with nearly
25% unemployment. And earlier this
month, their credit rating was downgraded to the brink of junk status.5 Once you put all that together, it’s easy to
see why even Rafael Nadal’s triumph at the French Open6 isn’t enough
to generate optimism.
But
the big problem with Spain is the bailout they’ve requested. For some, the idea of loaning one-hundred
billion of anything is absurd. For others, the number isn’t nearly high
enough—the most pessimistic analysts think it barely a band-aid. Spain’s government
(in addition to their banks) needs their own bailout, and the two together could top over 300 billion. Regardless, it all means that Spain is
becoming an even bigger drag on the European economy than Greece. The most frightening fact of all, the EU’s
total remaining bailout fund is €557 billion.7 That would be obliterated if Spain were to
get all the money it needs.
Meanwhile, Back in the
Colonies …
So now you know what’s happening on the other side of
the pond. We even found the room to slip
in some sports. But why is it affecting
us?
Before I answer that, remember these two facts:
·
Money knows no barriers.
·
Speculation drives the markets.
We
live in a global economy. While
countries might separate themselves with boundaries, walls, languages, and
currencies, money is allowed everywhere.
We invest in other countries, buy products in other countries, loan
money to other countries (or apply for loans, as the case may be), and even
send our businesses to other countries.
Even the pond I mentioned isn’t enough to keep us apart. The ripples at one shore are always felt near
the other.
Or
at least, we believe they are.
Look
at the second fact again. Speculation
drives the markets. The volatility we
see can be traced back to one simple phenomenon. Much of the time, we make decisions based on
what we think might happen, not on
what actually has happened. It’s true that if Greece defaults, or if
Spain sucks the EU dry, then all their neighbors will genuinely be
affected. And we would be affected as well, if indirectly, and for many of the
same reasons. But none of that has
happened yet. Greece hasn’t defaulted, and Spain hasn’t yet
sunk. It’s our fear that plays a large part in making the markets drop. We speculate, and then buy or sell as
appropriate.
So
that’s the big reason for the market volatility. Europe is in trouble, and it’s stressing us
all out. Now, that’s not to say big
things aren’t happening over here, too.
Here’s what’s going on in our country, at least as far as the markets
are concerned:
·
Optimistic
speculation abounds that the Federal Reserve will soon
provide more stimulus to the economy, possibly by buying up more bonds.8
·
In May, home builders filed for the greatest number of
building permits since 2008, far above predictions. That could mean an uptick in the housing
market, which has remained gloomy.9
·
May also brought us an extremely disappointing jobs
report, with unemployment rising slightly to 8.2%. It was the first rise in a year.10
·
Congress continues to squabble, meaning that another
fight over raising the debt ceiling looms.
If Congress can’t agree to act in some fashion, tax increases and spending cuts will be automatically
triggered at the first of next year.11
·
The biggest hamper on optimistic speculation is
uncertainty, and there’s never more uncertainty than during an election
year. Economists, speculators, and most
of all, politicians, are all waiting to see who our next president will be
before making too many decisions.
They’re uncertain, and uncertainty might be the biggest weight on the
markets of all.
So there you have it,
I know it’s a lot of information to digest, but I’ve always felt that part of
my job as your advisor is to make sure you’re informed. Personally, I don’t think there’s too much
cause for concern. As I alluded to above,
these are old problems that we’ve known about for some time. While the European debt crisis is certainly
important, it doesn’t mean that the goings-on in Greece will have an immediate
effect on you. As long as we pay attention and don’t allow
ourselves to react emotionally, we’ll be able to continue on the road toward
your financial goals.
It would be
impossible for me to say what’s going to happen next, but I’ll tell you this:
at the very least, you can always be sure that my team and I are staying
up-to-date. If something ever happens
that could affect your personal
economy, you’ll be the first to know. So
go and enjoy your summer. Have some fun
with the people you like best. And
remember that we’ll always be here to hold down the fort.
If
you have any questions about Europe, the markets, or anything else, please give
us a call at 215-886-2122. We’d love to hear from you.
Sources:
1 http://tinyurl.com/6wrbuu6 2 http://tinyurl.com/cm9g84n 3 http://tinyurl.com/38bdq 4 http://tinyurl.com/6ugjfbd
5 http://tinyurl.com/847zv46 6 http://tinyurl.com/7gwzu25 7 http://tinyurl.com/6ugjfbd 8 http://tinyurl.com/7knao64
