It appears to be the consensus that the ongoing debt crisis in Greece is having a significant impact on the U.S. stock market the past couple of weeks. Despite the recently announced European Union mega bailout package, aimed at shoring up Greece’s balance sheet and putting an end to fears of contagion, a sharp increase in volatility has returned to the markets.
While the situation is dire for Greece, and potentially a few other European countries such as Portugal and Spain, the lasting effects of either an attempt at austerity or outright default should not necessarily have a lasting, deep impact on U.S. stocks. A good historical comparison is the fiscal trouble that most of Latin America faced during the first half of the 1980’s. With the exception of Columbia, El Salvador, and Guatemala, every Central and South American country defaulted on its debt between 1980 and 1986. Even though the U.S. banking system had significant exposure to these counties’ sovereign debt, the S&P 500 had a very good return during this period.
While there are always a multitude of factors at play, and historical comparisons are never “apples to apples”, this example of widespread regional default is a reminder that the U.S. stock market is very resilient and is ultimately able to shake off the dire headlines of the day.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.