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Markets have already rebounded from a worldwide selloff Tuesday caused by fears emanating from Italy's political struggles. At least initially, investors have seen the Italy crisis as an opportunity to find cheaper stocks to buy - rather than a reason to leave the equity markets.
For now, that seems about right. The power struggle in Italy brings back memories of 2011-2012, when the "PIIGS" seemed to threaten the very existence of the euro . But in U.S. markets in particular, that period proved a fruitful opportunity for investors. The S&P 500 has more than doubled since late 2011. At those lows, investors had a myriad of stocks to buy that would double, at least, over the next few years.
This, U.S. banks took a hit on Tuesday, and several look attractive at current levels. Other quality stocks look cheaper as well.
That said, investors do need to keep a careful eye on Europe. Political infighting isn't likely to actually lead directly to the collapse of the Euro. But with European bonds still at seemingly absurd prices, any increased fears could lead to substantial losses in those markets - and impact markets elsewhere. And given the exposure to Europe of so many U.S. multinationals, slower growth on the Continent and a stronger dollar could pressure already-struggling stocks.
The Italy Crisis
The news on Tuesday sounds familiar. Back in 2011, investors worried about the solvency of the 'PIIGS' (Portugal, Ireland, Italy, Greece, and Spain). A collapse in the debt of any of those countries was likely to prove "a contagion". If the EU had to bail out one of those countries, investors would flee the others. At some point, those countries simply would have to leave the euro, leading to a potential endgame in which the unified currency fell apart, with drastic impact on European economies.
To be sure, the news in 2018 looks far better. But as the Italy crisis shows, it's not perfect. As a Mouhammed Choukeir of Kleinwort Hambros pointed out , Italy still has an unemployment rate of 11 percent, and "is one of the [most] indebted countries in the world." The failure to create a coalition government in the country will lead to new elections, and those elections could deliver a new government that is willing to consider leaving the euro.
In that scenario, other European banks would be left with Italian assets that would be sharply devalued, thus raising fears that their own solvency could be at risk. Italian bonds already have plunged of late, with yields (which move inverse to prices) doubling in barely a month. Issues in Greece and Portugal have followed.
For now, the crisis should be contained. Italy still is working toward a compromise. The EU and the ECB (European Central Bank) still have dry powder to manage any fallout. But there are echoes of early-decade fears in Tuesday's news.
Are There Stocks to Buy …or Sell?
Beyond broad market implications, the question is whether the selloff has created an opportunity - or risk - for any specific stocks or sectors. Both appear to be the case.
In terms of an opportunity, big U.S. banks fell hard on Tuesday, and now, several look attractive. Bank of America Corp (NYSE: BAC ), which I've long recommended , has slipped below $30 for one of the few times this year. JPMorgan Chase & Co. (NYSE: JPM ) neared a YTD low, and should be considered here as well. Investorplace's Anthony Mirhaydari raised some technical concerns about the group on Wednesday. But for longer-term investors, recent levels look like an attractive entry point.
On the flip side, there's real risk to U.S. consumer stocks, particularly those with heavy exposure to Europe. I already detailed my concerns with the group earlier this month, and Italy's weakness isn't good news. The dollar has strengthened, resurrecting what had been a problem for companies like Procter & Gamble Co (NYSE: PG ) for much of this decade before moderating of late.
And the possibility of further economic weakness on the Continent could hit demand as well. P&G generated 23% of FY17 revenue from Europe. Over 20% of Coca-Cola Co (NYSE: KO ) sales come from Europe, the Middle East, and Africa. Philip Morris International Inc. (NYSE: PM ), already reeling from a big earnings miss , is another stock at risk.
How to Play Italy
For now, investors would be wise not to overreact in either direction. Tuesday's selloff did make some attractive stocks to buy cheaper. But the idea that a single political battle in Italy will lead to the breakup of the Eurozone is fanciful - at least for now.
Still, in a market not far from all-time highs, any jitters could have an impact. 2018 doesn't sound like 2011 or 2012 just yet. But if investors start hearing more discussions about 'PIIGS' and "Eurozone crisis", history could rhyme, if not repeat.
As of this writing, Vince Martin has no positions in any securities mentioned.
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