Greece Was Not Alone

Greece, China, and Puerto Rico all played a role in yesterday’s sell-off.  Yesterday was the biggest “down day” for the year, but in the grand scheme of things, it was not even close to catastrophic.  However, I wanted to address this with a quick blog.

It is impossible to quantify the role of each player in the sell-off … but I believe much came from Greece.

The bad news is that no agreement and heightened uncertainty took stocks down in Europe and in the U.S.

Greece is set to put this whole thing to a vote on July 5^th.  In the meantime, banks and the Greek market are closed, probably until at least the 5^th, as the ECB is no longer supporting Greek bank liquidity. That limits ATM withdrawals to sixty euros per day. This will only intensify economic problems in Greece.

As of this writing around noon, the market is basically flat.

I didn’t really get into China and Puerto Rico yesterday, so here it goes.

China & Puerto Rico

China surprised markets with a rate cut over the weekend. In case you have not seen it, China’s market is down 22% from the high on June 12^th. The rate cut did little to slow the market’s slide, which has now officially entered bear market territory.

Puerto Rico’s governor said it cannot pay its $72 billion in debt, which per the NY Times, has piled on more muni bond debt per capita than any American state.

How It All Ended

By the end of the day, the Dow fell nearly 2%, or 350 points, and we saw a big rally in Treasuries, with the 10-year yield down 0.14% to 2.33%.  If you are applying for a mortgage, this just helped.

The rise in yields for high-yield debt wasn’t encouraging either, and not surprising in a risk-off environment.

Bottom Line

In reality, a Greek default won’t hurt the U.S. economy at all because they are simply too small of a trading partner … but markets were shaken by their complacency.  As I stated in yesterday’s blog, very little Greek debt is held by the private sector. Most is held by European governments, the International Monetary Fund (IMF), and the European Central Bank (ECB).

Since the crisis began, firewalls have been in place that should prevent contagion from spreading through Europe.  The EU will ring fence Spain, Portugal and other countries that could be susceptible to this spreading, and frankly, what’s happening to Greece can’t being playing well among the populations within geographic proximity.  I believe this also really helps to reduce the odds of a “who’s next” scenario.

Perspective

It has been almost 4 years since the S&P corrected more than 10%, and even after that, the markets recovered and went on to new highs.  I get it that stocks are more richly valued today, BUT, the U.S. economy is much stronger and the ECB has demonstrated it will take measures to stabilize credit markets.  Both of these things were not as true four years ago.

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