April 20 marks the start of the biggest environmental disaster in U.S. history. It was on this date that an oil rig operated by British Petroleum (BP) in the Gulf of Mexico exploded.
On May 6,we had a bit of an explosion in the financial markets, which distracted us from the oil spill—at least for a while. That was the day the Dow Jones Industrial Average suffered its largest intra-day point drop ever. Almost suddenly, the Dow fell 998.5 points before bouncing back and closing down 347.8 points for the day. The blame for the “flash crash” was initially placed on everything from computers that automatically executed programmed trades to a trader with “fat fingers” who hit the wrong letter on his keyboard. The SEC is still investigating the events of the day and has yet to determine what the actual cause was.
There can be no doubt, however, that part of the blame goes to the rioting in Greece. Gil Scott Heron, a 1970s poet and musician once said, “The Revolution Will Not be Televised.” He was wrong—at least in this case. The selling of stocks took off in earnest at the same moment that Greek police and demonstrators clashed, an event widely televised on the trading floor of the NYSE. Investors were already nervous about Greece. Not only was there doubt about Germany’s commitment to saving Greece and the euro, but there was also a real Greek tragedy that took place the day before when three employees, one of them pregnant, were killed by a demonstrator who decided to firebomb their bank.
The events in Greece have brought the risks of sovereign debt to the forefront. At the CFA Institute’s annual conference in mid-May, several speakers focused on the dire consequences of too much sovereign debt. Niall Ferguson’s remarks were the most sobering. He suggested that the situation in Greece pales in comparison to what could happen in many larger economies—including the U.S. He said that focusing on debt as a percentage of GDP can be misleading.
Unfortunately, stocks suffered one of their biggest monthly declines just as many reluctant retail investors decided to go back into the market. I expect more selling ahead.