If an alien came down to earth and read our daily newspapers for the last 6 months or so, he would have thought that Greece is the most important country in the world. Every day, we read or hear news about Greece and how it shapes the market that day. It is not uncommon to read stories titled: "DJI is down because of Greece talks" or "S&P 500 is up because of hopes regarding Greece." I believe all this Greek talk is a little bit misleading.
I tracked the Dow Jones Industrial index between the first week of November and February 13th. I also tracked news regarding Greece between those two dates. As a result, I found very little relationship between news out of Greece and the movements of Dow Jones Industrial index.
I will share some examples with you. On November 9th, Greek prime minister - back then - Papandreou announced that Greece will do whatever it takes to avoid default and stay in the Eurozone. This assurance should have been bullish for the stocks, however the DJI was down by 3.20% that day.
On November 10th, Lucas Papademos was announced as Greek's new prime minister. On the same day, EU officials announced that it would take at least 2 years before the country's finances would be "ok" because it was in much worse shape than once thought. That day, DJI was up by 0.96% despite the bearish news.
On November 15th, multiple Eurozone countries announced their GDP growth for the last quarter. According to the Greek government, the Greek economy shrank by 5.2% in the third quarter, much worse than expected. On the same day, the DJI was slightly up, by 0.14%.
On November 16th, the new Greek government won a vote of confidence and got ready to start working. The winning of the vote of confidence by technocrats should have been bullish, but the DJI was down by 1.58% on that day.
On November 17th, Greece started discussions with its bondholders in order to agree on an amount for the haircut the bondholders would have to endure. The talks started on a positive route, however, the DJI ended the day down by 1.13%.
On November 18th, one of the three parties in the Greek coalition government refused to sign an oath saying that it would approve austerity measures pushed down by Germany. While this was bearish for Greece, DJI ended the day up by 0.22%.
On November 23rd, Greece agreed on a set of austerity measures including a new property tax for homeowners. This new tax would be collected through electric bills, which would make it next to impossible to avoid for the citizens. DJI ended the day down by 2.05% despite the "good news" coming out of Greece.
On November 29th, the Greek finance minister announced that Greece "has met all the conditions for the next part of the bailout and it would receive payment soon." On that day, the market was up by 0.28%, which is not very impressive.
During the month of December, we didn't hear much about Greece and the market was in a rally mode for most of the month.
On January 3rd, Greece was in the news again. The Greek government was appealing to the country's parliment saying "we either have to sign the austerity agreement or leave Eurozone, there is no third choice." Despite the difficult situation, the DJI ended the day up by 1.47%.
On January 12th, private bondholders and the Greek government continued their discussions. Both sides announced that time was running out, and failure to deal would be catastrophic. DJI was up by 0.17% that day.
On January 17th, the ratings agency Fitch announced that Greece's default was more likely than ever and urged investors to be prepared for the worst. Still, the DJI was up 0.48% for the day.
On January 18th, as the negotiations between Greece and bondholders were continuing, Greek prime minister said that bondholders would have to take massive losses, which the bondholders weren't willing to do at that time. In response, DJI was up by 0.78% that day.
On January 25th, there was a pause in the negotiations because they had been going on for too long without a solution everyone would agree on. The Greek debt deal was in jeopardy, however DJI was up by 0.64%.
On January 27th, Greek debt hopes were up again. Both sides announced that deal might be close, and the euro rose against the dollar as a result. However, the DJI was down by 0.58% that day.
On February 3, Germany said the ECB would not take a haircut on Greek bonds it is holding. This seemed necessary for Greek debt to become sustainable and a major blow, however, the DJI was up by 1.23% on the same day.
Conclusion: There are many examples like the ones I used in this article. There are many days when bad news come out of Greece and the market rallies, good news come out of Greece and the market plunges. I am not saying Greece is not important or a Greek default wouldn't have an effect on the market. What I am saying is that in the stock market, there are many variables that determine any given outcome.
While many people believe that Greece is the main market mover these days, I do not agree. Investors should not base their investment strategy on Greece as it doesn't seem to be as relevant to the stock market as our media would want us to believe.