Courtesy of Daniel Sckolnik, ETF Periscope
“For me, it is far better to grasp the Universe as it really is than to persist in delusion, however satisfying and reassuring.” — Carl Sagan
Wall Street is generally cognizant of the fact that if something walks like a duck, swims like a duck and quacks like a duck, it is reasonable to call it a duck. In terms of Greece, Spain, and the Eurozone’s escalating sovereign debt crisis, however, investors may be acting more like an ostrich up to it neck in sand than a winged waterfowl.
True, the market has been experiencing a serious slide since the clock struck May 1, the Dow Jones Industrial Average (DJIA) has dropped about 1000 points in the last 13 sessions while the S&P 500 Index (SPX) has shed over 100 points over the same time frame, leaving both indexes off about 7%. Not quite an “official” correction, but certainly a cause of concern for those who failed to heed the old admonishment “Sell in May and go away.”
But the question is this: Does a 7% sell-off accurately reflect the price that the equity market should now be sitting at if, in fact, the Eurozone is really amidst the throes of unraveling?
That of course depends on how you quantify the exposure of the S&P 500 companies to the Eurozone’s banking and debt crisis. (Figures vary on this account from the low to the high teens.) It also depends on how much impact on the global economy one would expect from the hit that China would take if a leading trading partner like the Eurozone deteriorates into a prolonged recession. Finally, the volume of flight-from-risk would have to be factored into the equation, as investors would be confronted with the dilemma of where to put their money should sentiment on equities turn strongly negative.
With Moody’s downgrading Spain, the recent G-8 meeting appearing to offer little more than the usual statements of concern that lack clear solutions, and officials of the European Union tossing out statements of the need for contingency plans in the event of a Greek default on their debts, it would not be foolish to at least consider the sharp drop in the market that would inevitably result in a recognition by Wall Street that the Eurozone may be downsizing.
Break out your risk-management tools from the toolbox,…
