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[While] it is true that the US economy is doing much better than Europe’s, and especially southern Europe’s, from my perspective, the trajectory of the U.S. economy and the U.S. stock market are very much tied to eurozone events. Here are four reasons why U.S. investors should not underestimate the potential impact of events in Europe. Words: 450
So says Russ Koesterich, CFA (http://isharesblog.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This, and the preceding paragraph, must be included in any article re-posting to avoid copyright infringement.
Koesterich goes on to say, in part:
1.) Europe Makes Up a Significant Portion of U.S. Exports
The U.S. economy is much more consumption driven, and therefore more domestically focused, than other economies. That said, exports still count, and the United States still sends a significant portion of its exports to Europe. While exact data is spotty, in 2010 (the last year for which we have comprehensive data), Europe represented roughly 30% of foreign sales of companies in the S&P 500 index. Were a European recession to degenerate into a full-blown crisis, exports to European countries would plummet. At the margin, this would detract from U.S. growth.
2.) A Rising Dollar Would Make US Exports Less Competitive
Since its 2012 peak, the euro has already depreciated roughly 8% against the dollar. To the extent fears of a European crisis continue to push the dollar higher, not just against the euro but against other currencies as well, U.S. exports would become less attractive to other countries. To be sure, a stronger dollar is ultimately positive for U.S. purchasing power and inflation, but in the near term, it would act as a further headwind for U.S. exports.
3.) Recent US stock performance could negatively impact US consumer spending
U.S. stocks are down approx. 10% from their spring peak….[and] the escalating crisis in Europe has also been a major catalyst for the recent…correction…. To the extent this drop hammers consumer confidence, it could have a modestly negative impact on consumer spending.
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4.) The European banking system crisis could impact credit creation in the United States
While US banks are in a much stronger position than their European counterparts — US bank capital looks adequate and there is little risk of a run on banks here — banking stress in Europe is being felt in the United States thanks to the interconnectedness of the global financial system. Last Friday, the Bank of America Merrill Lynch Global Financial Stress Index climbed to its highest level since the first days of 2012. At the very least, stress in the U.S. financial system may harm the nascent recovery in U.S. bank lending.
Conclusion
Looking forward, I believe a worsening eurozone crisis can still be avoided if European politicians get more aggressive in addressing their region’s, and particularly Spain’s, banking problems.
However, until we see more clarity from European policy makers, equity investors may want to consider maintaining a defensive posture as Europe remains a major risk for US stocks as well as for the US and global economies.
*http://isharesblog.com/blog/2012/06/04/4-reasons-europe-is-a-major-risk-for-us-stocks/ (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article
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