Life After the Greek Elections
Here is what we think might happen next and what the impact to investors will likely be:
European leaders, along with the ECB and International Monetary Fund begin openly discussing "Plan B."
In spite of being able to form a coalition government and softening their rhetoric, Greek officials run out of time and money. Various government services, including utilities, start shutting down, causing a rise in social unrest.
Global equity markets and commodities sell off.
Massive bond buying by Swiss, German, English and U.S., central banks will help quell the crisis within a week or two.
Global equity markets and commodities rally.
The ECB offers emergency funds, with minor conditions. This will have very little effect.
Capital outflows from Spanish and Italian banks will reach record levels.
The ECB will lower interest rates by 50 basis points while the IMF, U.S., China, Switzerland and several middle-eastern sovereign wealth funds pledge to isolate the risks and "ring a fence" around Spain and Italy to avoid a contagion. Unfortunately, they will likely end up ignoring Portugal and Ireland, so the crisis will spread further, albeit with less dramatic force.
The euro will sell off sharply, nearing $1.10, as Italian, Spanish and other periphery nations' debt yields soar to new highs.
In the most elegant form of hubris, Greek officials ask to remain in the union and retain the euro as their currency -- as long as all is forgiven (including debts). Oh, Icarus, you do fly too close to the sun.
This will surely impact the U.S. economy as well, as the stronger U.S. dollar will negatively impact our exports. Nonetheless, the U.S. equity markets will likely hold up fairly well and the S&P 500 index will remain within its current trading range of 1250 to 1315. Moreover, there is a chance these events have a significant positive impact.
My sincere hope is that Republicans and Democrats will take the lessons of Greece and Europe and decide to engage in real negotiations to avoid the "fiscal cliff" the U.S. is headed toward. What can I say, I am an optimist at heart, but will continue to advise investors to be defensive in their strategy. As we like to say at our firm -- optimistic by nature, defensive by strategy.
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