Global Glimpse Report

Staying the Course

The U.S. equity market has experienced heightened volatility in recent weeks as investors are digesting a variety of news items with long term ramifications.

Since the Euro crisis began a few years ago, Greece has been increasingly reliant on the “troika” of the European Central Bank, the European Union and the International Monetary Fund.  Essentially, Greece let their fiscal house get so out of order that international creditors and European agencies had to supervise the country’s fiscal policies.   The economic emissaries have been telling the Greeks “No, you can’t spend that much money.  No, you don’t have that much money.”

The recent Greek election brought the far-left Syriza party to power and now the Greeks have elected leaders who want to tell the babysitters to mind their own business. Led by the young Alexis Tsipras, Syriza is vowing to fight the austerity that has been implemented by the troika, which they see as imposed by rich nations on their poor, suffering country.

Syriza claims it wants to remain a part of the European Union and wants to re-negotiate its bailout.  Can Greece have its cake and eat it, too?  The idea that Greece can remain a Eurozone member in good standing and simultaneously fight the EU’s supervisory policies is doubtful.  Greece obviously wants to get the most favorable deal possible from the troika. The troika, however, fears that if they give a mouse a cookie (give Greece austerity concessions) then all the other mice (Portugal, Spain, Italy, etc.) will want to barter a better deal as well, something they cannot afford.

So we’re left with the equivalent of a staring competition and neither party wants to blink first. Perhaps the European Union is quietly preparing to jettison Greece and compartmentalize the damage. No one knows for certain, though, and this uncertainty has weighed on international markets as investors fear a “Grexit”, or a Greek exit from the Eurozone, and the possibly contagious side effects that may portend.

While the Greek tragicomedy has been in the works for years, recent U.S. data has also worried investors. The U.S. economy appeared to slow in the final quarter of 2014 to 2.6%, down from its blistering pace in the middle quarters of the year (4.6% and 5%). Weak manufacturing data and sluggish consumer spending reports also weighed on investors’ optimism. This is, in our opinion, much ado about nothing. The economy has been growing at a rate of a little over 2% a year fairly steadily since 2011. Growth doesn’t always come as smoothly as we would like, but most growth indicators have been solid and steady for a number of years.  We see no reason for this recovery and growth to stall, despite constant “noise” surrounding growth and deflationary concerns.

Tuning out this “noise” can prove challenging for investors.  Is this new jobs report the inflection point of a great turnaround? Is the recent GDP figure indicative of a larger trend? Does weak consumer spending in December mean that pocketbooks are closing up for good? These are questions we ask ourselves frequently. But we generally try to synthesize all of the data into a larger economic picture and view it from a less immediate perspective.   “Is the majority of the economic data moving in a positive direction over a number of months?” is a much more appropriate question than trying to tease out meaning from small pieces of the puzzle. We think it is.  While headwinds from Europe and Asia could potentially slow down the U.S. expansion, we believe the recovery to be on stable footing. And it appears that a rise in interest rates may be even further down the road than previously believed, which will support the markets, though Federal Reserve Chair Janet Yellen has yet to confirm the decision to delay raising rates.

Patrick R. McDowell