The sovereign debt issue in Europe is a direct threat to the U.S. stock market. It’s been like this for the last year, and it is likely to stay like this well into 2012. Prior to the European sovereign debt crisis, U.S. equity investors didn’t really care about what was going on over there, but times change—and they change quickly. That’s the one certainty in the stock market these days. Time horizons for investor expectations always seem to be getting shorter and unusual events like the sovereign debt issue seem to have a lingering effect on investor sentiment.
The great reckoning that’s going on is all about debt and the ability of entities, be they individuals or countries, to live within their financial means. The stock market hasn’t traditionally spent much time worrying about sovereign debt for the simple reason that the limits to all this debt haven’t reached the breaking point up until only recently. Precipitated by the subprime mortgage meltdown, large financial institutions and entire countries are now being forced to deal with their lack of prudence. The end result is a stock market that’s completely unsure of the future.
As I’ve been writing, it’s my firm belief that, if the sovereign debt issue in Europe did not exist, the U.S. stock market would be quite a bit higher than its current level. And not only this; but there would be a lot more hope towards the future. The U.S. economy is by no means in full recovery, but there are positive signs out there. Eventually, a new business cycle will take hold and investors will be buyers in the stock market. I’m currently in Europe and every financial professional I ask says the same thing: Greece shouldn’t have been allowed into the euro currency, because they weren’t strong enough financially. In fact, many people I’m speaking with say that it was kind of a fraud, with Greece’s sovereign debt problem revealed to be much worse than originally presented at time of membership in the monetary union. Regardless, the feeling I’m getting from the people I’m talking with is that they want the European sovereign debt problem fixed as soon as we do. Everybody wants to move forward now.
I think it’s fair to say that the stock market is holding up because of strong domestic earnings. I have a gut feeling that, in spite what comes of Europe’s sovereign debt problem, U.S. stock market investors are soon going to attach less significance to the issue. We can’t keep going on like this.
Currently, investors haven’t been willing to pay as much for the strong corporate earnings that we keep getting quarter after quarter (see An Earnings-based Stock Market Rally Soon—Is It Really Possible?). The stock market’s been trading on Europe’s sovereign debt fears, largely because of a lack of confidence after the subprime mortgage crisis. But I think this trend will soon change, because, eventually, you can’t argue with the numbers.
The stock market’s best asset for individual investors is higher-dividend-paying stocks. The main stock market averages aren’t likely to do anything spectacular over the next several quarters, and that’s why dividend income is a stock market investor’s new best friend.