Stocks: Focus on Greece and the Fed

By Markets Fool.com

Stocks are taking it on the chin Monday morning, although markets have recovered from even larger losses earlier in the session. At 11:45 a.m. EDT, the Dow Jones Industrial Average and the broader S&P 500 were down 0.7% and 0.5%, respectively, and the technology-heavy Nasdaq Composite Index was down 0.6%.

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The cause (if we're to identify just one) appears to be concerns that Greece and its creditors are running out of rope, or fuse, perhaps. Talks collapsed on Sunday, with Greece's negotiating contingent leaving European Commission headquarters after just 45 minutes, according to the Financial Times. Thursday's Eurogroup meeting of finance ministers may be the last opportunity to hammer out an agreement that unlock the remaining 7.2 billion tranche in bailout Greece desperately needs. What are U.S. investors to make of this?

There is presently no constructive basis for believing that Greece and its creditors (the European Commission, the European Central Bank, and the International Monetary Fund) will be willing or able to bridge the chasm that separates them in order to avoid a Greek default-- other than the vague notion that both parties don't want that outcome. Whether it is deliberate or a miscalculation on Greece's part, I believe it's now odds-on that Greece will default. Certainly, investors are pricing in an increase in this risk, asthe yield on Greece's two-year debt was nearly 27% on Monday, up almost two percentage points!

A Greek default, possibly followed by Greece's exit from the Eurozone, would likely have little to no economic impact on the United States, but it could certain produce some fireworks in financial markets -- note that the VIX Index , which tracks option-implied expectations for near-term volatility in the S&P 500 is up roughly 10%.

Closer to home, the Federal Reserve's rate-setting committee will convene tomorrow for its two-day June monetary policy meeting. No-one expects the Fed to implement its first rate rise in almost a decade; however, but the meeting will produce a summary of economic projections (Wednesday, 2:00 p.m EDT) and a press conference by Fed chief Janet Yellen (2:30 p.m.). Fed-watchers and the broader investment community will very curious to hear policymakers' assessment of the most recent economic data and whether they have changed their outlook for interest rates' "take-off path".

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Better-than-expected employment data for May, during which the economy added 280,000 jobs, added to last week's strong May retail sales report provide ammunition hawks that argue for an interest rate rise this year. At present, the futures market indicates December is the most likely timing for the first interest rate hike.

The focus on Greece is a useful reminder that risk isn't just an academic concept in textbooks and that policymakers on either side of the Atlantic may not have all the answers to every problem. Still, while they may be crucial for price-driven traders, neither Greece nor the Fed ought to trouble unleveraged, long-term investors whose time horizon extends through the next crisis/ interest rate cycle. If anything, a bit of volatility could provide the opportunity to buy high-quality assets at attractive valuations.

The article Stocks: Focus on Greece and the Fed originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.