Greece and China Have Made For a Crazy Week!

Should I be concerned about the recent market volatility from the events taking place in Greece and China? Let’s touch base on Greece first. The problems of Greece, and the Greek people, although monumental, are of little concern to long-term investors, and may even present bargains for those who can withstand the volatility in the short run.

The following are some reasons why Greece’s problems should not cause investors to panic or change course.

Greece’s economy is tiny. Greece has a gross domestic product representing less than 2% of the total Eurozone GDP. Also, European banks aren’t at risk. European bank exposure to Greek loans is estimated to be approximately $50 billion, down from $250 billion in 2008.

The stock market has dealt with similar events in the past and survived. What if our worst fears of a “Grexit” are realized? The stock market has weathered a variety of shocks over the past 70 years, including wars, assassinations, terrorist attacks and financial collapses, says S&P Capital IQ strategist Sam Stovall. Stovall says the market has fallen a median 2.4% on the day following such shocks, bottoming after eight days with a median loss of 5.2% and recovering completely after 14 days, on average. “History has shown that prior market shocks have usually proven to be better opportunities to buy than bail, primarily because the events did not dramatically alter the course of global economic growth,” says Stovall.

Positives being overlooked in Europe. For example, the June composite purchasing manager’s index, a measure of the health of the manufacturing sector, reached its highest level in more than four years. Consumer confidence is at a 13-year high in Germany, notes Audrey Kaplan, head of the international equity team at Federated Investors. Growth in gross domestic product is forecast to be 3% in Spain—better than in the U.S. Consumer spending and business investment is on the upswing in France. And even Ireland, in the same boat with Greece five years ago, has put its fiscal house largely in order.

We’ve got other things to worry about. In the U.S., the three most important issues for investors are economic growth, interest rates and corporate earnings. Steady job growth as well as strong home and vehicle sales bode well for the economy. The Fed may raise rates modestly in September, but the International Monetary Fund is among those calling for a delay until 2016. And as second-quarter earnings season kicks off, given continued recovery in the U.S. economy and moderating strength in the dollar, companies should have an easier time beating analysts’ lowered expectations, says Russ Koesterich, Blackrock’s chief investment strategist.

Now On To China

China's recent stock market downturn is the result of investor speculation, which was not only allowed, but encouraged by the government. The Shanghai stock exchange more than doubled from June of 2014 through the beginning of last month. Much of this rally was fueled by mom and pop investors who were buying stocks, oftentimes with borrowed money.

Some commentators have suggested that in light of China's slowing economy, the government promoted or endorsed policies that would goose the stock market higher to try and boost consumer spending and confidence. Well, many newbie Chinese investors took the bait and actually borrowed funds to buy stocks and were celebrating their new found wealth. These investors found out they weren't living or investing in reality. Thus, the recent market downturn is the result of a stock market correcting to more normal levels after an absurd run-up. Unfortunately, in China, many of their market reforms and regulations are severely lacking. As a result, the Chinese consumer/investor is going to have to take off their rose-colored stock trading glasses and get a much better understanding about risk/rewards and long-term investing. For more information on what has occurred in China, please view the following short video.

China bubble fueled by margin loans: Expert

 

 

 

 

 

 

 

In closing, the recent problems in Greece, the market downturn in China, and the NY stock exchange and United Airlines computer glitches all caused investors to get a little nervous resulting in the stock market taking a few steps back. That being said, as of this morning, the Dow Jones Industrials, S&P 500 and NASDAQ stock exchanges (including dividends) are positive year-to-date. As such, I believe investors should be more concerned about their weekend's activities being rained out, at least here in the KC Metro area, than their investment holdings. We have gone almost four years without a 10% correction in the S&P 500, and interest rates are still historically low. The Fed is not going to rush and raise rates dramatically, if at all, based upon all the factors I've discussed. In addition, the employment situation in the U.S. has been improving, and the economy is still growing.

Quotes 

"Some folks go through life pleased that the glass is half full. Others spend a lifetime lamenting that it's half empty. The truth is there is a glass with a certain volume of liquid in it. From there, it's up to you."

                   James Vuocolo

"Transparency, honesty, kindness, good stewardship, even humor, works in businesses at all times."

                   John Gerzema

Quotes selected by the IAG staff

"Never give up and don't ask why because every situation does not need an answer.  I'm a firm believer that I don't worry about anything I can't control."

                   Eric Davis

"Wherever you go, no matter what the weather, always bring your own sunshine."

                   Anthony J. D'Angelo

 

Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

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