Greek leaders sucker punched global markets over the weekend with steps that put the country on the brink of bankruptcy and a possible eurozone exit, causing widespread selling in Asian and European markets and an initial selloff in the U.S.
But don’t worry, market experts said, this too should pass, at least if the history of market shocks is any guide.
And when worry fades, trader attention can return to earnings fundamentals and the pacing of the Federal Reserve’s interest rate response to improved U.S. growth.
“This could end up being a real Greek tragedy, but historically, these kinds of market shocks don’t really represent a threat to global growth,” said Sam Stovall, U.S. equity strategist at S&P Capital IQ. “They tend to be short and shallow, with averages of one-day declines of about 2.5%.”
That certainly played out Monday, said Patrick O’Hare, chief market strategist at Briefing.com. Greece shuttered its stock market and closed banks for six days. Japan’s Nikkei closed down 2.9%, China's Shanghai Composite was off 3.3%, Germany's DAX lower by 3.5%, France's CAC 40 shed 3.6%, and Spain's IBEX settled 3.8% to the downside. U.S. averages were lower, too, but not as deep.
In the Now
Short-term, “there’s a risk-off mentality at this time, which is expected initially to hit a wide variety of stocks and exchange-traded funds with a long-only focus, particularly those with a European bent,” O’Hare said.
Greeks will vote on a referendum set for July 5 on whether to accept the terms its international creditors demand. The focus is on $350 billion of Greek debt and a $1.71 billion payment to the International Monetary Fund.
A “yes” vote, which the wider European financial community is encouraging, would result in an austerity program aimed at strengthening Greece’s economy. A “no” vote means Greece could be pushed out of the euro, what Stovall called a “drachma drama,” referring to Greece’s currency pre-euro.
In the meantime, wait it out, these analysts said.
“The U.S. stock market has weathered a variety of unanticipated shocks over the past 70 years,” Stovall said. “The speed with which the market recovers from these kinds of non-recession-related market shocks is impressive.”
Past as Prologue
Stovall tracked 14 market shocks, ranging from the Cuban Missile Crisis in 1962, the stock market crash of 1987, the September 11 terrorist attacks, and the “taper tantrum” fiscal snag of 2013, and found that markets decline a median of 2.4%.
“Even more encouraging was that following the initial response, the bottom of the shock-induced decline was reached in only eight days, and the S&P 500 [SPX] recouped all that it lost in just 14 days,” Stovall said.
Of course, that’s the median, and some market shocks have been more jolting than others. The next-day close on the SPX in the 1987 crash was a jaw-dropping 20.5%, and it took some 223 days to recover. But Stovall notes that weightier shocks like that “usually occurred within the confines of a bear market and did not precipitate the decline.”
The SPX is still in a bull market, and Stovall expects the drop to be short-lived, “allowing opportunistic traders to step in and quickly push share prices back to breakeven and beyond.”
Volatility Crackles, but You Shouldn’t Crack
Expect stock market volatility in the coming days, said JJ Kinahan, chief strategist at TD Ameritrade, but some bulls are likely to consider the dips as buying opportunities, considering that the broader market has been locked in a relatively narrow range since early May. The SPX, for example, has been closing consistently within a range of 2130 to 2075 over recent sessions (figure 1).
“Many traders will opt to ride the storm out, and until we close convincingly outside the range, it’s likely that we’ll see buying near the low and selling near the high end,” he said.
He also encourages investors to review their exposure to fixed income. “The most volatile market has been the bond market,” he said, noting that many 401(k) funds are heavy on bonds.
Whatever you do, don’t let emotions get the best of you and your portfolio.
“Don’t become your portfolio’s worst enemy,” Stovall said. “Typically investors might know when to sell, but they rarely know when to get back in.”