After a steady six-month surge, the stock markets are reversing
course. The S&P 500 is off roughly 5% since early April, and
signs are emerging that there may be plenty more downside on the
The problems for Greece -- and Europe -- keep mounting. The
continent's major economies have sharply slowed or slipped into
. And the financial agreements struck just months ago may already
be coming undone. Few are fully prepared to handle the events that
may play out in coming weeks and months.
If you are a long-term investor, then you need to simply ride
out this possible coming storm. If you are more of a short-term
investor that likes to zig in and zag out of stocks, then it may be
time to zag. Chances are some of your favorite stocks may be a lot
cheaper later this summer, so you may want to trim your sails now
and build cash.
The train is speeding up
Greece's financial woes have been playing out for several years,
giving the appearance of a slow-motion freight train slowly sliding
off the rails. That train wreck may soon speed up.
Greek voters chose to stay on the path of austerity (for now)
which Germany and other stronger countries had been insisting upon.
The country's runaway budget deficits must be reversed through a
huge pullback in government spending. For its part, Germany's
leadership role in the financing agreements has worn out its
citizenry, as many feel that further loans would just be "throwing
good money after bad." Meanwhile, German business leaders know how
important it is to retain the benefits that the unified euro has
brought to that
. No one's very happy about the current state of things.
Indeed, it's a stalemate, and unless we see one party blink, a
set of dominoes will start to topple, affecting your investments in
Here's how this may play out, in three successive steps, and how
it might affect your investments:
1. It's not just Greece
Even as Greek voters elected a government that stands by its past
agreements with the rest of the European Union countries, signs
that other countries may also need a bailout keep emerging --
Italy, Spain, Cyprus…
But any long-term gain for Europe comes with a huge amount of
short-term pain for global investors. The first and most immediate
effect would be a major banking scare as investors look to assess
the extent to which key lenders will be weakened. For U.S.
investors, plunging European markets could apply a similar pressure
2. Freaked-out banks bring European economy to a
Banking crises often portend a sharp slowdown in economic activity.
That's what happened in the United States in 2008 and early 2009
when banks spooked by the economic collapse put the clamps on
virtually all types of lending. European economies need to brace
for a similar possible fallout.
As it stands,
only the German economy is growing right now
-- all other key European economies are shrinking and it could get
worse before it gets better. That could have a direct effect on
U.S. businesses that have operations in Europe. By some estimates,
up to one-third of sales at companies in the S&P 500 are
derived in Europe.
3. Europe's economic woes send the U.S. and global economy
It's not just Europe. Asia and Latin America count on the continent
as a key export market. If there's less demand in Europe for
exports from countries such as China and Brazil, then that means
less money coming into those countries. That could sap those
countries' thirsts for the key capital goods that the United States
exports to them.
That's a big deal for
and many others. In light of all of this, a mere 5% drop in the
S&P 500 from the
could be viewed as an under-reaction to these gathering clouds. It
is certainly far from what the worst-case scenario could be.
The good news to come
After this potentially scary scenario plays out, there will be a
huge number of positives to focus on.
First, U.S. stocks are fairly inexpensive by historical
measures, and any coming sell-off will make them even more
attractively priced. It's crucial to focus on the fact that
corporate profits remain quite strong. Quarterly results that have
been announced in the past few weeks show how resilient many
companies are in the face of global headwinds.
Second, although the U.S. economy may be in need of a breather
over the next few quarters, the setup is in place for a period of
solid growth as we head into the middle of the decade. There is
historical precedent. In the middle of the 1990s, companies had
completed a wave of massive spending cuts and began to start adding
jobs again. That fed into a virtuous cycle as rising employment fed
more growth in many industries, A few years later, the U.S. economy
We may not see a boom this time around, but there's every reason
to anticipate decent economic growth into the middle of the decade
as payrolls expand and housing firms up.
Action to Take -->
Investors have reflexively shunned stocks whenever they experience
a periodic sharp drop. And the events in Greece imply we may be
getting another pullback soon. However, stepping into the market
when things get scary is the best move you can make, even though it
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MSFT in one or more if its "real money" portfolios.