It's All Greek to the Markets

The major stock price indices continued in a generally positive track through most of June, but with subdued trading activity. Technology stocks led the way, with the Nasdaq 100 up 19 percent over the past 12 months, an increase that is almost double the 10 percent logged by the Standard & Poor’s 500 Index. Analysts were hoping for the best concerning the resumption of the Greek debt negotiations and expecting to see June’s upswing continuing unabated into July. It was not to be.

On June 24, talks between Greece and European Finance ministers were cut short when the European contingent demanded sweeping changes to the proposals made by Greek Premier Alexis Tsipras. When no agreement was reached by the June 30 deadline, the markets in Europe and the United States saw significant declines – brokers here and abroad dislike uncertainty, especially when it affects the financial sector. Market experts vary on their assessment of how the situation might affect U.S. equities in the short and long terms. Although other European countries are not as tightly involved with Greece as they were back in 2012 when the crisis first hit, a default still has the potential to roil European markets.

How might the Greek crisis affect the United States?

While opinions differ, many brokers do not anticipate that a potential stalemate in Greece would seriously upset U.S. markets for any significant time. Of course, the eventual outcome is reliant upon the European markets taking what happens in Greece in stride. With this in mind, some U.S. traders are pessimistic. They note that the European economy is not yet out of recession, and that there’s a strong chance that other governments might default on bank loans as part of the trickle-down effect of the Greek crisis. Banks in the stronger European nations like Germany and France own bonds in the countries that are struggling. If there is a rising tide of bad debts among banks in other countries with healthier economies, it could generate a credit crunch. Less lending by European banks would inhibit economic growth. In turn, this would slow down the global economy, hurt U.S. industry, and also mean fewer customers for goods and services from the United States.

Federal Reserve

The seemingly endless debate concerning the timing of the Federal Reserve’s move to increase its key interest rates continues. Expectations were fueled by a report showing that the U.S. economy had contracted less in the first quarter of 2015 than originally thought. Federal Reserve Governor Jerome Powell was quoted in June, saying he expected a September benchmark interest increase with a second rate rise in December. Some investment traders are expecting that the Fed will raise rates slightly and then wait and see how the economy and the markets react.

Other economic stories that caught the attention of investors during June included reports about a widespread inventory shortage in the housing sector, and increased out-of-pocket health care costs for consumers.

The commentary above is for general purposes only. It is not intended to be a substitute for advice from professional tax and investment counselors.

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