“Wall Street greeted a second Obama term the way it greeted the first,” the Associated Press reported on the day after the election. “Investors dumped stocks Wednesday in one of the sharpest sell-offs of the year. With the election only hours behind them, they focused on big problems ahead in Washington and across the Atlantic Ocean.”
But of those two factors — Washington and Europe — the latter remains the most important. That’s because in practical terms, little changed in Washington. We still have a divided government. We’re still facing a “fiscal cliff,” though both sides have pledged to do what they must to avert it.
No, the real weakness is in Europe, which is staring down the barrel of a recession.
“In Europe, leaders warned that unemployment could remain high for years, and cut their forecasts for economic growth for the rest of this year and 2013,” AP explained. “The head of the European Central Bank said not even powerhouse Germany is immune.”
What most of the public — and many investors — missed last week, amid the cacophony of the election, was the failure of a European summit to address any of its problems. Austerity plans are overwhelmingly unpopular, sparking demonstrations and even riots across the eurozone.
“Growth in Germany, Europe’s largest economy, is likely to weaken in the fourth quarter of this year and the first of 2013 as firms postpone investments due to the euro zone crisis,” Reuters reports. “The Economy Ministry said on Friday it expected ‘a noticeably weaker economic dynamic’ over winter.”
Why is this important to U.S. markets — even more important, perhaps, than the “most important election in our lifetimes,” as many commentators (mistakenly) called it?
In addition to the simple fact that Europe is our largest trading partner (and when they stop buying, we stop selling), there’s the “contagion” effect. Our banks have significant stakes in European banks, and any run on those institutions would inevitably have a dramatic effect here.
Of course, many pundits blamed the stock sell-off on Wednesday and Thursday on the election.
“The stock market is correct in going down today … I think what’s going to happen in Obama’s second term is going to be a currency crisis; a sovereign debt crisis,” predicted financial writer Peter Schiff. “It’s going to be the same thing that is happening in Europe or Greece.”
But wiser investors know better. While Schiff’s dire predictions could come true, we already have a Europe and Greece. They’re called Europe and Greece. And they’re our most immediate financial problem.