The stock market went down an awful lot yesterday. Is it time to panic?
The market shifted from concern over the debt ceiling to panic over Europe. Some investors are running a bear-raid on Italy and Spain, just as they did earlier with Greece, Portugal, and Ireland, and just as they did three years ago with Lehman. Many folks are understandably nervous. To them, the European debt crisis looks eerily like the sub-prime debacle did in ’07-’08.
Like then, officials tried to downplay the crisis in its early stages because the main actors are so small. Greece has less than $250 billion in foreign-held debt. Like then, concerns about financial interconnectedness are leading to fears of financial contagion. Like then, restructuring and default are causing many to question what assets are risk-free, even as sovereign downgrades proliferate.
Still, the financial crisis didn’t become a credit crunch—which made the downturn much more sever—until a large money market fund “broke the buck” because it owned Lehman debt. That caused a flight from money markets, which created a cash-crisis in the world’s largest companies: GE, Deere, and so on. It’s hard to see what might be the transfer mechanism now, although regular funding needs by the European nations could push their interest expense higher and exacerbate their fiscal woes.
Still, until yesterday, the downturn had been fairly modest, confined to the European periphery and perhaps Spain and Italy. But lately it’s been widespread: stocks around the world are facing a “risk-off” trade as investors flee to safe havens.
When markets get irrationally gloomy, investors are wise to stay put. Unless your money is in Lehman or Greek Government Bonds, things tend to turn out all right.
Douglas R. Tengdin, CFA
Chief Investment Officer
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