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Question:


What's the update on the European markets? How will this affect me as an American with money in the stock market?
-InternationalRachel


Answer:


Ahh, summer in Europe. It's not just about strolling along the Seine or having a caffe con panna in the Piazza Navona. It's also about recession and unmanageable debt. But don't overestimate the extent to which their problems are our problems. As one fund manager that I spoke to recently sees things, if the euro zone vanished, leaving nothing between the English Channel and the Swiss Alps, it would reduce American economic output by a grand total of 2 percent a year. Big deal, right?

You may have noticed, however, that the U.S. stock market has fallen by a whole lot more than 2 percent since the latest phase of the euro crisis struck a few months ago, even without the euro area vanishing. The decline in stocks, which reached about 10 percent, is a result of fear of what might happen rather than what has happened already or may reasonably be expected to occur, along with concerns unconnected to Europe.

It's not that there are no risks. Certain sectors of the U.S. economy, such as banking, are more vulnerable than others to a failure by Europe to reach a long-term solution to its various woes, some of which are related directly to the euro, others of which are not, such as very high labor costs. Some companies in other industries that export heavily to Europe may be in jeopardy too. It's possible that share prices in affected companies already reflect the potential drop in earnings, if not more, however. The same may apply to stocks of European companies, which have taken even bigger dives than their American counterparts.

Bottom line, Europe is doing your net worth no favors if you own stocks, but once investors calm down, markets here and there are likely to bounce back. And if European leaders come to grips with the shortcomings of their economic system, stock prices in Europe and elsewhere could skyrocket, but that may be a long shot.

-Conrad de Aenlle



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