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Home>Daily Capital>Investing & Markets>Market Digest – Week Ending 5/11

Market Digest – Week Ending 5/11

[dropcap]G[/dropcap]reece roared back to the top of the financial news after election results raised doubts about the implementation of last year’s bailout agreement. The resulting uncertainty drove investors to reduce risk. Stocks and the Euro fell. Treasuries rose. Gold declined, creating additional concern about its role as a safe-haven asset.

Weekly Returns

S&P 500: 1,353 (-1.2%)

MSCI EAFE: (-2.1%)

U.S. 10-Year Treasury Yield: 1.84% (-0.04%)

Gold: $1,580 (-3.8%)

USD/EUR: $1.292 (-1.3%)

Major Events          

  • Sunday – France elected Socialist challenger Francois Hollande as President. The consensus view is that Hollande is unlikely to seek reversal of the fiscal compact with Germany.
  • Sunday – Greek conservatives won elections, but fell far short of enough seats to take power, deadlocking Parliament and raising doubt about continued membership in the Eurozone.
  • Monday – German factory orders rose 2.2 percent in March, exceeding most forecasts.
  • Wednesday – The Spanish government announced it would take a large stake in Bankia, allaying fears the country’s fourth largest bank would collapse.
  • Wednesday – The National Association of Realtors said median sales prices for single family homes rose in half of US cities in the first quarter.
  • Wednesday – President Obama officially stated he supports gay marriage.
  • Thursday – Cisco reported a 20 percent profit increase, but gave a cautious outlook for revenue growth.
  • Friday – JP Morgan shares drop after announcing a $2 billion trading “mistake”.
  • Friday – The May University of Michigan U.S. consumer confidence survey rose to the highest level in four years.

Our Take

We knew Greece would again roil capital markets, but we did not expect anything eventful to happen this year. However, a poorly judged decision to hold early elections has plunged the country back into chaos. The Greek population is struggling to accept austerity measures demanded in exchange for bailout money. Meanwhile, officials from other European countries (including Germany) have begun to openly discuss Greece leaving the Euro.

An exit from the monetary union, which looked unlikely just a few months ago, is now highly probable.  British bookmaker Ladbrokes suspended betting on Greek withdrawal after odds fell to 1/3 – meaning it is heavy favored to do so. Gambling lines tend to be surprisingly insightful, but for those don’t believe the punters, Citigroup issued a statement suggesting similar odds.

What will happen if Greece exits the Euro? There are several feasible outcomes, but the reality is nobody knows. One thing that seems nearly certain is if Greece can’t pay bills and salaries in Euros, a new drachma would be significantly devalued. At the extreme, it is unclear if Greece would be able to maintain civil order. All of this would be tragic for the Greek population, but Greece is only 2 percent of Europe’s GDP, so the impact to the broader economy and stock market could be contained. One risk is that people living in Portugal, Spain and Italy watch Greek citizens lose most of their money and start a run on banks to withdraw Euros. The ensuing financial uncertainty could be calamitous. More likely, however, the ECB and stronger European governments will be able to prevent bank runs by making extreme guarantees that bank deposits will be protected and paid in Euros.

There can be no such thing as an “orderly” Greek exit from the Euro. It would be a hit to an already weak regional economy. There are too many unknowns to predict the severity of repercussions on the global economy. Greece may stay in the Eurozone. But if it does exit, it will no longer be a surprise to anyone. The rest of Europe has had time to create a well thought out game-plan. Meanwhile, stock prices already reflect much of the potential risk. There is room for significant upside as well as downside.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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