Greece is the Word
Last week, I spent four hours with very capable J.P. Morgan investment analysts. We covered the investing issues of the day:
Greece is the Word
In the Eurozone, Greece is an “outlier” in terms of its debt load and challenging economic conditions. The EU can afford to cut Greece loose a.k.a. “the Greexit.” Yet, that would openthe door to other countries considering separation like Spain or Italy. The separation of those countries, due to the relative size of their economies in comparison to the Greek economy, is a much larger concern.
The Greek’s creditors have two difficult choices: 1) a likely total default on the Greek debt if it separates from the EU. 2) Or, taking a significant discount on the current outstanding Greek debt and facilitating Greece to stay in the EU. There is no doubt that both Greece and its creditor countries are currently posturing in the media -- both need to “appear tough” to seek an effective compromise and quell voter sentiment within their countries. Will Greece ultimately leave the EU? One J.P. Morgan analyst estimated that probability at 25%.
Interestingly, the European and international stock markets are continuing to hold up pretty well through this tug of war. This Year to Date (YTD) stock market performance chart indicates that many international stock markets are continuing to outperform the U.S. market.*
If the EU ultimately ends up restructuring itself with a Greek separation or country separations beyond that, EU stock market disruption could likely occur. But, some very strong companies operate out of the EU such as Volkswagen, Allianz, Vodafone, etc. Such companies would be impacted by local difficulties, but hardly sidelined. The revenues and financing of many large EU companies come as much from outside the EU as from within. If an EU restructuring occurs, a further buying opportunity may be presented for EU companies. We will continue to monitor and keep you posted.
The U.S. Federal Reserve Board (FED) decided this week to leave interest rates at extreme lows. However, the FED has also telegraphed that it is likely to raise interest rates either later this year and/or next year. We are currently expecting the FED to raise rates modestly, but several times over the next year and a half. Since we expect that the FED will raise rates if the “economy can handle it,” modest rate hikes may well be interpreted as an economy which is doing well, which may be interpreted as a reason to continue to hold US equities and many types of bonds.
U.S. Equity Markets
With the above in mind, the Dow Jones Industrial Average increased approximately 2% this week to 18,094 as of its opening this morning, Friday, June 19th.
As always, please let us know your thoughts and questions.