Many people take no care of their money 'till they come nearly to the end of it, and others do just the same with their time. -- Johann Wolfgang von Goethe
The eurozone has been sinking into a steady and extended recession, and if there is some reason for that trend to reverse itself in the near future, it isn't an obvious one at the moment. But is that something Wall Street needs to be paying close attention to in the short term? Only if it doesn't want to be caught off guard, as it seemed to be with the recent Cyprus banking debacle. There are simply too many crosscurrent events occurring at the moment to ignore from the eurozone, the kinds of things that can suddenly coalesce into something akin to an economic rogue wave.
Granted, Wall Street had a much better go of it last week than the preceding one, when Cyprus appeared to be dangerously close to imploding. All three of the major indices ended the last five-session cycles in the black, though not quite enough to recoup the losses that resulted from the recent Cyprus "event." The Dow Jones Industrial Average ended the week in the black by 1.1%, but still off a full 1% from the previous week's fade. The benchmark S&P 500 Index rose 1.7%% last week, while the tech-laden Nasdaq Composite Index outperformed both the SPX and the Dow, adding 2.3% to its bottom line over the course of the same period.
The U.S. equity market seems to be inexorably marching toward an extended testing of new highs, as the current corporate earnings season has conformed closely enough to expectations so as not to upset the bullish uptrend that has been in place for the majority of 2013. The same can be said for the domestic economic data, with even lower-than-expected GDP numbers failing to fluster the market in any serious way. It's as if the fundamentals of the actual economy, with stubbornly high job numbers and minimal growth, are not quite enough to dissuade the bulls nor unshackle the bears. It's as if Wall Street was a different beast than Main Street, a somewhat related but distant cousin, as it were.
But the eurozone may be brewing a mix that could impact investor sentiment in short order. The first ingredient to the tumultuous soup starts with an absolutely unsustainable level of unemployment among the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The latest numbers out of Spain and Greece are disheartening, with more than 26% of the general population out of work and a staggering 58% unemployment rate among the 25-and-under labor pool. Not far off is Italy and Portugal, both topping the 37% mark. The second ingredient is one that can be seen as the region explores a nascent shift from austerity to growth. It is here that the potential for surprise really lies, as political winds can blow strong and gain sudden momentum, with the possibility for toppling dominoes causing a powerful impact on multiple economic fronts.
The austerity argument, long a staple of Germany's Angela Merkel and a slew of many eurozone financial ministers, has started to seriously falter, as the region is now entering year two of its current recession. The political will that has allowed the austerity argument to prevail over the last several years can't compete with the reality of the bad jobs numbers that are directly attributable to the constant belt-tightening that has been geared toward combating the region's sovereign debt and banking crisis.
The shift may be plainly seen in the recent round of Italian elections, with results indicating that Italy has had enough of the austerity prescription. The country's new Prime Minister, Enrico Letta, has promised to focus more on growth and less on budget cuts. The change in the prevailing winds can also be heard in the words out of Berlin, where Germany's Finance Minister, long a vocal and consistent advocate of austerity measures, said that, in regard to recognizing the need for adjustment to the status quo, "We are not bureaucratic, we are not stupid."
On the other hand, Merkel -- unarguably the most influential power in the eurozone -- is, as is the saying goes, "between two stools." Recent indications are that she is recognizing the need to encourage growth in the region. Yet with a national election just five months off, she must deal with those in her party who feel as if Germany should stay the course of austerity, as well as a high percentage of an electorate that has little interest in continuing to support the ailing PIIGS.
As has been the case historically in Europe, there are strong undercurrents of nationalism that run counter to the best interests of the eurozone on the whole. That leaves the region exposed to a long list of possible problems that can turn its current recession into a full-blown depression. That won't happen all at once, of course. But as has been seen most recently with the Cyprus event, it only takes the strong whiff of possible contagion to send investors back into the realm of doubt and fear over the region. That reaction could trump the current uptrend on Wall Street, as investors might look closer at the fundamentals not only at the bottom of the Q1 earnings season, but also in the macro economy at large.
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