The European debt crisis has been weighing on investors’ minds all summer. And despite the recent stock market rally, the only thing that’s truly known about the euro zone sovereign debt debacle is that it has to be fixed for the market to mend.
Whether it’s fixed or not is not even up for debate. There is decided lack of certainty on the issue. And whether or not Europe has a viable plan also is up for debate. Is final adoption of the sweeping changes proposed by President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany likely? Will it be enough?
More questions than answers remain on the issue — which should give investors a serious cause for concern despite the recent rally.
On Oct. 4, the Dow Jones Industrial Average hit an intraday low of about 10,360. On Friday, the markets soared as high as 11,750 — a 13% leap in two weeks. A strong rally is a great thing to see after the volatility of the summer, but you have to wonder if this is too much too fast.
Even if the euro zone debt deal is approved and enacted — which is anything but a sure thing in the wake of the Slovakia politicking and continued protests in Greece — it seems a bit unrealistic for the market to rally further. After all, it’s not like austerity agreements mean growth in the euro zone. Far from it. As government jobs are eliminated and taxes are increased, the economy of Europe is going to feel the burn.
Elsewhere in the world, it’s also bleak. Persistent unemployment remains a big problem in America and inflation is eating away at consumer budgets. While fears of a “hard landing” in China might be overstated, the reality is that China is indeed slowing down. Brazil is crippled by inflation. For chart watchers, technical analysis shows a clear “sell” signal. The list goes on.
The best-case scenario is that an accord already is baked into the market with the recent optimism. European leaders will hug it out during the weekend at the European Council in Brussels over their so-called “comprehensive” plan, and final adoption of the proposed deal could take place among EU leaders early next week.
But is that worth another 13% up from here? Another 5% Another gain at all?
Yes, earnings from some big-name stocks were good, so maybe some of these gains will stick. But a more likely scenario is that waffling among European leadership reignites panic, or that Wall Street decides the vaunted plan still might not be enough to cut it.
Moody’s (NYSE:MCO) already said that France’s top-tier credit rating could be at risk if this solution doesn’t pass muster. Moody’s said France’s credit rating “rests on investors’ confidence in the government’s ability and its willingness to tackle unforeseen challenges.” That’s the understatement of the century.
I am an optimist at heart and believe this will work itself out eventually. But as an investor, it appears to me that Wall Street already has priced in a favorable resolution to the euro zone debt crisis.
It also has happened to price out persistent unemployment, weak consumer spending, trouble in emerging markets and many other economic troubles that have not gone away.
Oh, and don’t forget that pesky Congressional supercommittee that is sure to spark some fireworks as we get down to crunch time over America’s own debt issues.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.
