Patience will prove a valuable virtue to investors who white-knuckle it through the roller-coaster ride of uncertainty that has characterized Greece’s most recent balancing act on the edge of economic collapse.
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U.S. stock markets sold off for a second straight day Tuesday – the Dow Jones Industrial average was down more than 200 points at 12 p.m. EST on the heels of Monday’s 46 point loss – as skittish investors awaited word on a possible new compromise plan for Greece to pay down its massive debts.
On Sunday, Greek voters overwhelmingly rejected further austerity measures proposed by its European creditors. The ballot catapulted Greece into unfamiliar territory as no one seems to know what will happen if Greece defaults on its next bailout payment due on July 20.
Will Greece be forced out of the 19-member Eurozone? Would a ‘Grexit’ threaten the stability of the euro, Europe’s 15-year experiment with a single currency? Will a default by Greece lead to a contagion in the region that could spread throughout Europe and eventually across the Atlantic to the U.S.?
No one has the answers to those questions. Consequently, investment advisors are trying to put Greek’s debt crisis into a broader perspective, telling their clients to remain calm and not panic at the latest headline blaring doom and gloom.
In the first place, most analysts believe the lion’s share of any fallout from a Greek default will be contained primarily to Europe, and even that will be limited.
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“We can expect this to cause volatility and sell-offs in European markets and potentially very serious long-term political implications for Europe. However, assuming that policymakers respond reasonably decisively to signs of contagion, we do not currently believe the result poses a broader risk to European investors or the European recovery,” said Stephanie Flanders, chief market strategist for Europe, J.P. Morgan Asset Management.
Resist the Temptation to Trade on Headlines
Still, the impact on the citizens of Greece and that country’s already badly-damaged economy shouldn’t be underestimated. On average, according to Flanders, 59 Greek businesses have gone out of business every day since the beginning of 2015. That number is certain to have escalated since last week when Greek officials closed the country’s banks to prevent additional runs on deposits. The lack of access to cash and an overriding sense of chaos has also taken a severe toll on Greece’s main industry – tourism, as an untold number of foreigners have cancelled travel plan to avoid the mayhem.
Even so, Flanders said Europe’s economy has not “been seriously affected by the Greek crisis so far. We can say the same for European financial markets.”
European taxpayers will be on the hook for Greece’s debts should Greece exit the Eurozone, and the move could have as yet undetermined long-term geopolitical ramifications. But Flanders said the crisis does not yet pose “major immediate risks to peripheral economies, the European financial markets or the eurozone recovery, all of which are now much less exposed to and better equipped to deal with Greek contagion than they were in 2011 and 2012.”
The European Central Bank is equipped to handle the fallout and has signaled its willingness to do so should market conditions warrant extraordinary measures.
Paul Christopher, head of global market strategy for Wells Fargo Investment Institute, summed up the advice of many U.S. investment advisors: “We encourage investors to be patient, watch for a Eurozone response to Greece, and resist the urge to trade on Greek headlines, which we believe are largely political and not based on fundamental factors.”