By seadmin
The situation in Europe continues to weigh on stocks. During the past week, we’ve seen the resignation of not one, but two prime ministers in the troubled region. Greece’s George Papandreou and Italy’s Silvio Berlusconi both are out. Hope exists that new governments in those respective nations will help to pave the way for what thus far has been an elusive deal to bail out these troubled debtor nations.
Even if a bailout deal is reached, the problems plaguing Europe are likely to continue weighing down stocks for some time. High borrowing costs, such as the 7% spike that we saw in Italian bond yields, make it extremely hard to sustain any kind of economic growth. In turn, the lack of growth in Italy and other euro-zone countries could shove the region into recession.
If we do see a recession in Europe, or even the threat of protracted economic malaise, we are likely to see a big sell-off in stocks in the region. We’ve already seen that happen since May, when the iShares S&P 350 Europe Index (IEV) began a major decline. The fund is down nearly 20% during the past six months, and that’s officially a bear market.
I think the more disturbing thing about Europe is that it serves as a window to America’s deficit and debt issues. Like Europe, we are spending way more money than we take in. That means we have to finance our upside-down financial system with debt. Unlike Europe, the interest rate we have to pay our debtors is at record lows. One reason why is because the U.S. dollar remains the world’s reserve currency.
Relatively speaking, the United States is one of the safest bets out there. Despite our fiscal issues, we remain a safe haven for global capital. It’s ironic that this is the case, given our current deficit and debt issues. But by comparison, we remain a shining city on an otherwise shaky global hill.
What I want all Alert readers to be aware of is that you must follow what’s happening in Europe if you want to be one-step ahead of what’s likely to happen in U.S. markets. To borrow a slogan, what happens in Europe doesn’t stay in Europe. If Europe’s problems persist, then we could have a global recession that will put big-time pressure on stocks of all stripes. If that situation happens, you’ll want to get out your Bear Market Survival Guide!
