Dollars and Sense: Bad news in Europe might be good news for U.S. investors
Money | Warren Cole Smith
Up, up, and away. The markets just keep climbing. The Dow closed above 15,000 for the first time ever on Tuesday, and it continued to set new records on Wednesday and Thursday. Both the Dow and the S&P 500 are up about 14 percent for the year, which by any historical measure is outstanding performance. The economic recovery, though weak, is fueling some growth. Corporate earnings were strong in the second quarter, and that led lots of analysts to believe stocks are not over-valued. Money is coming off the sidelines and back into the markets. When you combine all these factors, you get a record rise in the markets.
Bull into bubble? Of course, there is a dark side. The Fed’s bond-buying program is also inflating the cost of assets, and stock prices have been the prime beneficiary. Seaport Securities Vice President Jacob Weisberg thinks we have more upside, though he wouldn’t be surprised to see a correction at some point, even calling it a “good thing.”
Greek mess. If anything could precipitate a correction, it might be news out of Europe. After a season of quiet, we heard this week that Greek unemployment has hit 27 percent. Worse yet, youth unemployment topped 60 percent. According to Reuters, “Greece's jobless rate has almost tripled since the country's debt crisis emerged in 2009 and was more than twice the eurozone's average unemployment reading of 12.1 percent in March.” The Greek government has lowered the minimum wage by 32 percent in order to make more jobs available. (In a crisis, the truth will out: if you want to help the poor and unemployed, you don’t raise the minimum wage, you lower it.) Greece's economy is in its sixth year of recession, and it’s expected to contract by as much as 4.5 percent this year.
When bad news is good. So should that bad news make us less nervous or more nervous about the markets? Actually, less, because, that bad news, while a tragedy for the people who are struggling with unemployment, is putting some healthy skepticism and risk-aversion in the economy. Markets crash when people’s natural skepticism disappears. When people say, “This market could never crash,” they start taking foolish risks. That’s what happened in 2008, and that’s what’s happened in just about every market crash in history. So I feel for the people who don’t have jobs now. It’s terrible for them and their families. But in general, keeping an eye on the bad news is what keeps markets honest.
A few more jobs. In the meantime, while Greek workers struggle, the jobs picture continues to get slightly better here in the U.S. The Labor Department reported a welcome but unexpected drop in jobless claims. Claims fell 4,000 to 323,000. The less-volatile four-week moving average fell to 336,750, its lowest level since November 2007. Experts I’ve been talking with, though, say the reason for the drop is fewer layoffs. They say there’s still not a lot of new job creation going on in the economy. If job creation continues at current levels, we could see unemployment stay above 7 percent for the rest of the year.
Copyright © 2014 God’s World Publications