Greece Lightning

Last week, we saw stocks rally following the biggest weekly sell-off of the year. The market and the news focused briefly on China in the early part of the week. This was because their government started to signal that they were ready to do more to promote growth.

This positive news only lasted until a report surfaced that the former Prime Minister of Greece indicated his country is making preparations for a possible exit from the eurozone.  He later downplayed his remarks on CNBC, but he was stating the obvious – a return of the Greek Drachma and an exit from the eurozone is a distinct possibility.

Here’s how the market ended up for the week.  Please notice our new format which I think is easier to read. It includes year-to-date returns and some bond yields as well.

Although the big item on everyone’s mind is Greece…

It’s NOT ABOUT GREECE!

Greece, by itself, is too small to have much of an impact outside of the headline risk in the news.  With all due respect, it does not really produce anything and the size of their economy is insignificant in the grand scheme of things. However, it’s very much like striking a match. The match itself flames up, but there is a fear that the spark will start a major fire.

So it’s less about Greece and more about the rest of the European Union (EU) members – Spain specifically.  No one knows for sure how an exit might play out.  One scenario that has everyone worried is that if there was a Greek exit from the EU, the newly-issued Greek currency would devalue almost immediately.  (Question – do they even still have the printing presses to print the Drachma?)  This could spark bank runs in Portugal and Spain because people in those countries would want to get their Euros out of their banks before they would be converted to the old currency – which would then be rapidly devalued just like Drachma will be devalued in Greece. This, in turn, would heighten fears about the longevity of the euro currency.

I suspect the European Central Bank (ECB) would step in as lender of last resort and offer the necessary liquidity.  In fact, last Tuesday, the Financial Times reported on its website that the ECB has quietly provided 100 billion euros (about $125 billion) in loans to Greek banks. This implies that the ECB probably won’t hesitate to go to extraordinary lengths to prop up the eurozone financial system.

As for US jobs, well, economists expect nonfarm payrolls (companies focused on manufacturing, construction, and producing goods) to rise by 150,000 jobs when the number is released on June 1. The recent slowdown has mostly been chalked up to weather by the Fed. However, continued weakness, something nearer to 100,000 jobs, could gain some attention and raise talk of an extension of the Fed’s Operation Twist – which means replacing short-term Treasuries with long-term Treasuries in the hopes that lower interest rates will support the US recovery. Operation Twist is scheduled to end on June 30.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2,10 and 30-year Treasury yield is simply the yield at the close of the day for the noted historical time period.