Investors and politicians are missing the point. With a sharp focus on the negative news surrounding Greece and the Euro currency, investors are indiscriminately selling stocks with fortress balance sheets and excellent growth outlooks. We have been adamant that years of corporate cost cutting have led to operating leverage that is now poised to generate strong profits. As the economic recovery broadens, earnings will continue to surprise on the upside. Equities should perform well in this environment because gains will be based on tangible fundamental underpinnings.
For those who worry that the Greek debt crisis will spill over into larger Europe and ultimately undermine the nascent recovery in the States, several facts are worth noting. First, Greek economic output is roughly the same size as Ohio’s. Portugal’s economy is comparable in magnitude to Maryland’s. Second, as the Euro currency loses value against the US dollar, Germany and other European export economies benefit because their goods become cheaper versus competing products. At 1.22 USD/EUR, the Euro is still 3% higher versus the dollar than the average exchange rate (1.18 USD/EUR) since the currency’s debut in 1999. And it has been much lower (in the 80’s) without disastrous consequences for Europe or America.
Politicians are also missing the point. Very few question that financial regulatory reform is needed. If for no other reason than lifting the confidence of investors, some level of reform is due. However, what is likely to emerge from Congress is significantly off the mark in terms of addressing the root causes of the housing collapse and ensuing worldwide credit crisis. We agree that certain activities, including monumental leverage and predatory lending practices, are dangerous for the system and should be better regulated. However, the reform package does not meaningfully address poor underwriting standards or Fannie Mae and Freddie Mac. Talk about not addressing the elephant(s) in the room!
Rather than expanding government with a new “consumer protection agency,” lawmakers could help restore confidence much faster and more efficiently with three actions, each of which could be implemented immediately: restore the uptick rule for the short sales of stocks, standardize circuit-breakers across exchanges, and standardize margin requirements across traded securities. These actions won’t fix everything, but they would likely tamp down the recent volatility and boost confidence. Until Washington completes its FinReg machinations, heightened volatility will persist. Neither FinReg nor Greece undermines the excellent long-term opportunities in stocks at current valuations.