After announcing Greece would hold a referendum to put Greece’s creditors’ demands to a vote the people of Greece overwhelmingly voted “no” to their bailout conditions. The move pushes the country closer to an exit from the eurozone as Greece’s banks are close to running out of money. The ECB would be unlikely to continue to accept Greek government debt as collateral for additional liquidity causing Greece’s banks to collapse. In order to save its banking system, Greece would then be forced to print its own currency as it can’t issue Euros. Greek leaders want to resume bailout talks, but the two parties appear far apart. While the future for Greece and its citizens is murky and will likely involve a great deal of economic pain, elsewhere and especially away from Europe the effect will likely be relatively muted.
Global markets have experienced substantial volatility over recent weeks with each twist and turn in the crisis. European markets given their direct exposure to the crisis have fared worse than the US. After the “no” vote world markets fell with Europe again dipping to a greater degree. Given Greece’s relatively small size and position in the global market, it will be unlikely to have an outsize impact on markets. In addition, most of the debt is held by public institutions and not private companies. This limits the risk of a Lehman type event causing a drastic swing in the market.
A potential concern would be other countries with weaker credit possibly following the path of Greece. European leaders would want to deter this possibility, but if this were to happen, the high quality fixed income allocation we recommend would help protect your portfolio and counter any weakness on the equity side; specifically from international holdings. On the equity side, markets will be volatile, with Europe seeing larger swings given their direct exposure to Greece. Despite the international volatility, we continue to recommend maintaining exposure to stock markets outside the US. Attempting to time the market by moving out of international equity until the situation in Greece is settled is likely to cause more harm than good for a portfolio.
While you may be tempted to throw in the towel on equities, and international equities in particular, it’s important to remember that major market moving events periodically occur. Not overreacting and remaining broadly diversified is key to staying on track to meet your long term investment goals.
Index Performance June 2Q YTD Trl 1Yr
US Stock (Russell 3000) -1.67% 0.14% 1.94% 7.29%
Foreign Stock (FTSE AW ex US) -2.70% 0.96% 4.79% -4.10%
Total US Bond Mkt. (BarCap Aggregate) -1.09% -1.68% -0.10% 1.86%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.09% 0.03% 0.90% 1.32%
Municipal Bonds (BarCap 1-10yr Muni) 0.04% -0.51% 0.32% 1.74%
Cash (ML 3Month T-Bill) 0.00% 0.01% 0.01% 0.02%
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