Greek Crisis Update—Market Reaction Muted
Equity markets are down following the Greek referendum NO vote, where the majority of Greeks voted against accepting more austerity directives from Eurozone leaders and bankers. And although the impact is painful for the people of Greece—a 25% drop in GDP in 5 years and 50% unemployment among youth—the referendum’s decision is likely to have a minimal impact on S&P 500 company earnings and on Eurozone GDP.
- Impact on U.S. Corporate Earnings—We do not believe there will be any immediate negative hit on S&P 500 earnings. Here at home, in a Factset conducted search of S&P 500 earnings conference calls to gauge the level of concern about the situation in Greece, not one company mentioned Greece as having any negative earnings impact, on any of these calls.
- Impact on Eurozone Growth—Greece makes up barely 3% of Eurozone GDP, so the impact on Eurozone corporate earnings should be minimal. We continue to see positive signs of economic growth in the Eurozone with increasing auto sales, middle market commercial lending, and increased consumer spending.
- Risk of Contagion—This go-around with Greece is much different than five years ago, when the European Central Bank was only discussing putting in place banking mechanisms to control the risk of spillover effects into Italy, Portugal, and Spain. Since then, the ECB has put in place a number of these mechanisms, including emergency liquidity assistance, and outright monetary transactions, purchasing Eurozone member debt in the open markets and standing ready to step-up these purchases in the event of a Greek exit from the Eurozone.
- Geopolitical Ramifications—Angela Merkel of Germany is very aware of the importance of a unified European Union, especially in the wake of the crisis in Ukraine. We believe she will make every effort to keep Greece in the Eurozone. The resignation of Greece’s sometimes volatile Finance Minister, Yanis Varoufakis, should pave the way for more productive talks at Tuesday’s emergency meeting.
We are reminded of past crises and the importance of staying the course and not trying to time the markets. We thought you might find the following chart, showing the market’s response to past crises, of interest.
As always, we are here to answer any questions or concerns you might have.