Stock Returns Strong Despite Eurozone Weakness
Following the 1990-1991 global recession, much of core Europe likely could have used accommodative monetary policies to goad growth. But that wasn't an option. Why? The Bundesbank didn't need to stoke German growth but sought to restrain the mark, strengthening the ECU's relative value.
Since the ERM allowed member nations to deviate only marginally from fixed exchange rates, central banks eventually and reluctantly followed Germany's tightening. Thus, their foreign exchange reserves dwindled, GDP fell again across the continent -- a regional "double dip" -- and by fall 1992, the crisis reached a breaking point. On Sept. 16, 1992 ("Black Wednesday"), currency speculators "broke" the Bank of England, and Britain subsequently exited the ERM. But the mechanism's unraveling -- and the European recession -- continued into 1993.
The economic fallout from defending, then later discarding, currency pegs was obvious across Europe in 1992 and 1993 -- but the U.S. and world overall grew, as shown in the chart below.
And perhaps more important for investors, global stock markets proved resilient to Europe's woes. In 1992, world stocks measured in U.S. dollars were down a little -- nearly identical to 2011's small drop. But they rose a hefty 22.5% in 1993, even though much of Europe was in recession as the year began! Why? The problems were Europe-specific and the world overall was fine. What's more, stocks move first. World stocks likely priced in Europe's weakness in 1992 and in 1993 were pricing in better times ahead -- the global economic boom that would last the rest of the 1990s.Recent economic data suggest much of the world is doing fine or even accelerating. History never repeats perfectly, but we anticipate markets can have a similarly robust retort to European weakness in 2012.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV