Why Are Greece's Familiar Troubles Triggering a Drop in U.S. Stocks?

KALAMAZOO, Mich. - July 20, 2015 - PRLog -- Why Are These Familiar Troubles Triggering a Drop in U.S. Stocks?
Greece's recurring problems cause concerns about Europe and the future of the euro, the common currency used by Greece as well as 18 other European countries. Uncertainty is contagious, and U.S. stocks have also dropped due to these concerns. However, we think the fundamentals of economic and earnings growth are improving globally. The troubles in Greece are likely to have only a minimal effect, so we recommend that long-term investors stay invested and add quality stocks, including international investments, if appropriate.

Greece Faces Tough Choices
Greece's debts are high, and the economy has been in recession for most of the past six years, shrinking more than 25% from 2009. The current bailout agreement is over on July 1, and Greece wanted additional bailout money on easier terms. However, other European leaders wanted Greece to make more painful spending cuts and economic reforms.

Here's What Happened

•  For the past few years, Greece and its creditors have reached agreements at the last minute, and that outcome seemed likely this time, too.

•  Instead, Greece called a surprise referendum for July 5, shut the banks and imposed limits on withdrawals to stem the flood of money leaving the banks. European leaders refused to extend the current bailout.

•  As a result, Greece defaulted on its June 30 payment to the International Monetary Fund (IMF).

While most expect that Greece will vote on July 5 to accept more austerity and stay in the euro, no one is certain what will happen next.

Markets Hate Uncertainty, But Investors See Opportunities
In the past, concerns about Greece were much greater because other European countries were also in recession and had similarly high debts, and European banks owned a lot of Greek debt. Today, the situation is better:

•  Other European countries have lowered their government debts by spending less and raising taxes.

•  Most of Europe has returned to growth, although weak.

•  Most of Greece's debt is owned by international institutions like the IMF, not European banks.

As a result, the impact of Greece's troubles on the rest of Europe is much less today than in the recent past.

Regardless, stocks hate surprises, and Greece is likely to continue to cause uncertainty and more short-term market volatility. But the global economy is growing, and companies are still increasing their sales and earnings. That's why we think lower prices offer opportunities for investors. Consider adding quality stocks and investing internationally using the stronger dollar, if appropriate. More importantly, keep your investments aligned with your long-term financial goals, not with the short-term headlines from Greece.

Kate Warne, Ph.D., CFA
Investment Strategist

Investing in equities involves risks. The value of shares will fluctuate, and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.