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The Euro Crisis and Budget Crisis: Where Are They Now?

By: Martin Tillier
Posted: 9/12/2013 10:44:00 AM
Referenced Stocks:

We live in an age of information overload. If you comb through the various internet news sources, cable television and print media it is always possible to find something to worry about. The sad fact is that in finance, as in other things, sensationalism sells. Presenting every bump in the road as an insurmountable hurdle that could have serious consequences for our investments generates clicks and viewers.

I tend to write mainly about short-term trends, whether in broad markets or individual instruments, but it is important to remember that the vast majority of people who follow markets have long-term goals. For those people, focusing on each new possible disaster creates stress at best, and at worst its own disaster. Stepping back and looking at the big picture can be hard, but I find it helps to look back at things that seemed to have the potential for disaster at the time, but have since been forgotten by many.

The summer of 2011 saw a number of things that contributed to a feeling that everything was about to come apart. From July 22nd to October, 3rd the S&P 500 lost over 18%. Two things dominated any discussion of markets at the time. Either one was seen as having the potential for disaster, but taken together, many of those watching the parade of perma-bears on financial news channels felt that total collapse was inevitable.

The Euro Crisis:

What: Problems had begun at the beginning of 2010, when it was revealed that Government indebtedness in Portugal was worse than had been previously reported. Fears were rife that all of the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) could be forced into some kind of bankruptcy. Talk of the collapse of the Euro and a resulting world-wide depression was common. As a program of austerity was implemented, social unrest erupted in Greece and pictures of riots added to the sense of impending doom. The EU was forced into repeated bailouts creating dissent among member nations.

Since Then: “The Euro Crisis” has faded from the headlines. There are still some underlying problems, but the belief that the EU will, when push comes to shove, do what it takes to resolve them is now the conventional wisdom. The Eurozone is still intact.


The Budget, The Debt Limit and The Downgrade:

What: Throughout the summer of 2011, Congress set about ensuring its popularity sunk to all time lows. Both sides of the aisle demonstrated childish behavior, intransigence and a general disregard for the economic wellbeing of the country as they fought over the nation’s finances. Two things stood out. Failure to agree on a budget brought about The Budget Control Act of 2011, which allowed for mandatory, across the board cuts in spending should no agreement be reached the next year. At the time this was seen as an acceptable compromise, but many feared devastating effects should the politicians stay true to form and refuse to negotiate effectively.

There was also the fight over the debt ceiling. What had previously been a routine authorization by Congress of a debt limit extension to pay the bills became an event that led to many questioning the value of the “full faith and credit” of the US Government. This in turn led to S&P actually downgrading US Government debt on August 5th. There was no shortage of people saying that this heralded complete collapse.

Since Then: The ability of politicians to create panic in the markets has remained, and we are facing the same fights again this year. The actuality of sequestration, however, was not the catalyst for financial disaster. Reduced Government spending has undoubtedly provided a short-term drag on the recovery, but the overall economy has been remarkably resilient.

The downgrade from the coveted AAA rating by S&P now looks like a damp squib. No other ratings agency followed suit, the market shrugged it off and Treasury yields continued to fall.

 As I write, I can remember the fear of a “double dip” or worse that the news coverage at that time engendered. The same could be said of the times the Middle East has flared up, an emerging market economy has wobbled, or some other event was seized upon as the next terrible disaster for markets. Looking back, while these things were significant, the prospect of total economic meltdown looks a little over hyped, and that is the point.

As we enter a period when bad news is likely to dominate, it will pay the long-term investor to keep this in mind. From the beginning of May 2011, the S&P 500 fell around 20% to the low in early October. Looking from the beginning of May until now, however, the index has gained around 24%.

This week marks the 5th anniversary of the bankruptcy of Lehman brothers, so it would be wrong to imply that some crises don’t turn out to be as advertised. However, when talk of the end of QE and political battles start up again, think back to two short years ago. Trade the moves by all means if that is what you do, but if you are investing for the long term, keep in mind that what looked like disaster at that time has turned out to be a blip in an upward march. Keep your eyes on the prize. Not every bit of bad news is a crisis.