In the following piece, Fifth Third’s Investment Management Group recaps the market and how it reacted to various events in the month of June. I hope you find this Financial Market Roundup helpful and informative.
July is National Hot Dog Month in the United States and according to the National Hot Dog and Sausage Council, Americans will consume seven billion of these tubes of mystery meat between Memorial Day and Labor Day. Most of us ate them with reckless abandon when we were younger, but as the years went by we began to understand the relative merits of eating salads and lean fish. But that shouldn’t take away from the experience as long as you enjoy them in moderation and limit your overall exposure to these tasty links. In the spirit of managing through not-entirely healthy situations, today we turn our attention to the Greek Crisis. However, once you consider both the size of Greece’s economy and the precautionary steps taken to minimize exposure to their financial markets in recent years, you begin to realize this dog has more bark than bite.
However, before we dig deeper into the Greek dilemma, let’s first take a look at the June numbers for risky assets:
- The MSCI World Index, a broad measure of developed world’s stock markets, declined 2.33 percent for the month.
- The S&P 500, a measure of large U.S. companies, declined 1.94 percent for the month.
- The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, declined 2.53 percent for the month.
- The MSCI REIT Index declined 4.58 percent for the month.
- Gold declined 1.41 percent for the month.
How did Greece get to this point? Well, it seems like the global economy, and to a greater extent the European economy, has been held hostage by the Greek crisis for the better part of a decade. In 2009, in the mists of the Great Recession, Greece announced that it had been grossly underestimating its deficit figures for years. As a result, they were shut out from borrowing in financial markets and were pushed to the brink of bankruptcy. Over the course of the next three years, Greece was thrown a lifeline in the form of two bailout packages, totaling over 240 billion Euros (approximately US$264 billion), and multiple rounds of debt forgiveness. However, the bailouts came with conditions as the lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases.
Fast forward to today, despite the best efforts of the international creditors; Greece is once again on the verge of default. Her Prime Minister has essentially gone “all in” on the belief that Europe will concede in the form of a new bailout package, with less austerity demands, based on the premise that Greece is too big to fail. Essentially, Greece’s leaders are adopting a “yes, it will hurt me, but it will hurt you too” posture. But this argument is tragically flawed. The truth is the European creditors are holding all the cards. They have a number of tools at their disposal that will help to minimize the fallout of a Greek exit. First of all, the European Central Bank can expand its bond buying program (QE) to keep interest rates at manageable levels. Secondly, the eurozone is structurally more robust than it was five years ago, enabling it to limit its exposure to Greece’s financial woes.
Where does this put the U.S. investor? Well, heightened levels of concern are certainly justified, but we have to remember that Greece accounts for less than half a percent of the global economy. We should expect domestic bond markets to be affected the most because there is a strong relationship between European and U.S. interest rates. If uncertainty persists, and to the extent that we continue to see a flight to quality, we’d expect U.S. rates to show a downward bias. From the point of view of the Federal Reserve, Greece is giving them yet another reason to put off, or push out, the first rate hike in almost ten years. In particular, if the euro currency were to weaken appreciably against the dollar, the Fed would likely postpone lift off to lighten the burden on domestic exporters. We also just don’t expect the central bank to hike rates into global market turmoil.
Market commentary provided by Fifth Third Bank. Source of
statistics is Bloomberg.com. Returns are calculated from market close on 6/1/15 through 6/30/15. This information is current as of the date of this
letter and the opinions expressed are subject to change at any time, based on
market and other conditions. This information is intended for educational
purposes only and does not constitute the rendering of investment advice or
specific recommendations on investment activities and trading. The mention of a
specific security within this letter is not intended as a solicitation to buy
or sell the specific security. Index performance shown within this letter is
not representative of any Fifth Third managed account.
Investing involves risk, including the possible loss of principal invested.
Diversification does not assure or guarantee better performance and cannot
eliminate the risk of investment loss.
Past performance is no guarantee of future results. Indexes are unmanaged, do
not incur investment management fees, do not represent the performance of any
particular investment, and may not be invested directly into by investors.
Small company investing involves specific risks not necessarily encountered in
large company investing such as increased volatility. Investments in foreign
markets entail special risks such as currency, political, economic and market
S&P 500 Index is a composite of 500 companies, amongst the largest based in the United States, and it often used as a
measure of the overall U.S. stock market.
MSCI EMF (Emerging
Markets Free) Index is a free float-adjusted market
capitalization index that is designed to measure equity market performance in
the global emerging markets. As of June 2006 the MSCI Emerging Markets Index
consisted of the following 25 emerging market country indices: Argentina,
Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India,
Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru,
Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
MSCI US REIT Index
is a free float- adjusted market capitalization weighted index that is
comprised of equity REITs that are included in the MSCI US Investable Market
2500 Index, with the exception of specialty equity REITs that do not generate a
majority of their revenue and income from real estate rental and leasing
operations. The index represents approximately 85% of the US REIT universe.
The MSCI World Index
is a free float-adjusted market capitalization weighted index that is designed
to measure the equity market performance of developed markets. The MSCI World
Index consists of the following 24 developed market country indices: Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong,
Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United
is the U.S. dollar per Troy ounce.
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