February 6, 2013
It's not unusual to lose your balance while standing on a peak.
And so it goes with the stock market. Investors suffered some fear of heights Monday and sent the Dow Jones industrial average tumbling. It was the worst day of this year, with a triple-digit decline amid a powerful five-week rally. But after second-guessing that rally for a few hours, investors decided Tuesday that they are still on solid ground.
They pushed the Dow back to near a five-year peak again, and at 13,979 the index remains close to its all-time high of 14,164, recorded in October 2007.
At such heights, investors feel compelled to give more attention than they otherwise might to anything that could unseat stocks. European debt issues became that preoccupation Monday, as the agreements forged last year to help indebted nations such as Spain, Italy and Greece looked like they might become unhinged by changes in the political landscape.
Until this week, Europe had faded from investors' consciousness. Investors assumed the eurozone would make it through its debt crisis when European Central Bank President Mario Draghi promised in July to do "whatever it takes." Both U.S. and European markets have been climbing since then, except for a short twinge of worry after the presidential election, when investors thought Congress would send the U.S. over the "fiscal cliff" and into recession.
But now politics and scandal in Europe could shake the agreements that were so reassuring to Europe. In Italy, with an election looming this month, major issues have been lax supervision of troubled banks and unpopular austerity measures and reforms. During the political campaign, Draghi has been criticized for the role he played in bank regulation in his previous position, as governor of the Bank of Italy. But investors seem to be particularly focused on the possibility that former Italian Prime Minister Silvio Berlusconi could be elected, and that he would balk at the austerity measures that other European leaders insist Italy comply with if the country is to get aid.
In Spain, another key political figure involved in international debt negotiations is being challenged. Prime Minister Mariano Rajoy is at the center of a scandal over alleged illegal party finances. He has denied any wrongdoing, but as investigations continue the markets fear a change in political leadership, or the election of leaders who would not support bailout requirements imposed by European countries. In such a case, the issue is whether banking and debt problems could again undermine stability at home and, potentially, globally.
Reports from Europe this week "reminded investors (if only for a day) that, while the worst of the sovereign credit crisis in the European periphery appears to have passed, Europe is by no means out of the woods," said Clark Yingst, chief market analyst for Joseph Gunnar & Co. "Work on structural reforms, necessary if Europe is to compete in an increasingly global economy — but also imposing additional pain on the populace and thus politically unpopular — appear to have stalled."
European banks are still fragile and in need of help, which was obvious recently when the Dutch government provided a bailout to a major lender.
Capital Economics economist John Higgins said he thinks the eurozone crisis will flare up again in the second half of this year.
But while Europe's political issues unnerved investors briefly this week, U.S. investors relaxed Tuesday when they focused on home turf and the business environment. After all, the major lesson for investors in 2012 was that despite a lot of hand wringing over government debt catastrophes that were feared in both the U.S. and Europe, politicians eventually stepped up at the last minute to avert disaster.
In the U.S. attention turned Tuesday to typical business considerations that investors are better equipped to understand than politics. The announcement that Dell founder Michael Dell and private equity firm Silver Lake Management would be taking Dell private at a 25 percent premium over the recent share price of $10.88 allayed some of the recent concerns by investors that the stock market has become overpriced, and consequently, positioned to fall.
Technology shares led the stock market upward, and investors ignored the most recent concerns raised by the Congressional Budget Office. It reported Tuesday that with the recent tax increases and automatic $85 billion in government spending cuts this year, the economy will grow very slowly, at 1.4 percent, and that unemployment would rise.
Maybe the markets were unmoved because President Barack Obama proposed the spending cuts be delayed, or perhaps investors have found that it's simpler to keep their eye on corporate profits and business fundamentals than on global politics.
Copyright © 2014 Chicago Tribune Company, LLC