Special Report: Market Volatility
May 26, 2010
I would like to take this opportunity to present Weston Financial's commentary on the recent stock market volatility. While the problems with the Greek sovereign debt are serious and should not be dismissed, we do not believe that these concerns alone merit the recent drop in the markets. Rather, we believe the recent volatility is the result of a steadily climbing bull market that needed a breather and a market psychology that has not fully recovered from the events of 2008.
The stock market has been on a steady climb since March of 2009. As stated in prior Weston Observers, many in the investment world were anticipating a market correction as early as last fall, but until this point we had only experienced smaller market pullbacks. The market's decline recently exceeded 10%, which is considered a market correction. Corrections in bull markets are not only normal, but can be healthy. Corrections provide investors who are holding cash on the sideline with a lower entry point. They also create market pessimism, which is a bull-market's best friend.
In addition, investors have not forgotten how connected the financial world was in 2008. The drop in real estate values ultimately crippled banks, governments, insurance companies as well as Main Street. Greece by itself is a small economy. It is currently the 34th largest economy in the world, falling behind Venezuela, Malaysia and Nigeria(1). However, investors are extrapolating the concerns of Greece to larger European economies like Spain and Italy. While these nations undoubtedly have their own fiscal problems that must be monitored, we believe these worries would not be as large of a concern if we were not in the wake of 2008.
The current European events will likely have both positive and negative impacts on the global economic recovery, which will filter through to the equity markets. The strengthening of the U.S. Dollar in relation to the Euro will likely have a negative impact on U.S. growth as a stronger U.S. Dollar makes American products more expensive in Europe. On the contrary, the falling Euro should ultimately benefit European exporters. A country like Germany, that derives much of its GDP from exports, should benefit from the fall of the European currency.
There is also concern that European governments will implement austerity measures to improve their fiscal position. These measures include a decrease in spending, which will potentially hurt growth. On the other hand, the market turmoil should also keep global interest rates low. Countries like Germany will likely delay raising their rates as the falling Euro decreases the risk of inflation. In addition, investors seeking a safe haven from the market turmoil have increased the demand for U.S. Treasury bonds. This has driven down the yield of these bonds and has pushed domestic interest rates even lower. This is beneficial for the U.S. economy because it provides cheaper financing
Volatility and event-driven risk are likely to remain elevated for an extended period. If the Greek debt issue is any guide, investors will have a heightened sensitivity to the daily headlines, which will create choppy trading. Ultimately, we believe that investors will refocus their attention on the underlying economic conditions. Assuming we continue to see improving data, this would be a positive for the equity markets. In any event, we believe recent events support Weston Financial's core investment philosophy of time frame investing governed by your personal financial goals. As always, please contact me with any questions or concerns.
Footnotes:
- Data obtained from the Central Intelligence Agency.
The views expressed here are those of Weston Financial Group, Inc. and are subject to change based on market and other conditions. The information we provide does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. All material has been obtained from sources believed to be reliable but its accuracy is not guaranteed. There is neither representation nor warranty as to the current accuracy of such information, nor liability for decisions based on such information. Past performance is no guarantee of future results.
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