What the European Crisis Really Means for the Stock Market

You’ve got to love today’s stock market.

It’s up over 100 points one day, down over 100 points the next. When the market drops more than one percent, the popular Internet sites are quick to quote analysts who say the market rally is over. When the market is up over 100 points, we get other analysts telling us that Dow Jones 12,000 is in the cards.

There is no doubt that the financial crisis in Greece can be contagious. Spain, Portugal, Italy…are they next? I think they are, and I have written about this in the past. The euro unraveling is a good thing for the American dollar and a very good thing for Britain, which early on decided to pass on joining the euro, deciding to keep its own currency.

In each of the past three years, when I’ve travelled to Europe, I’ve come away wondering how the citizens of these countries support themselves. A school teacher in Italy makes about 20,000 euros ($30,000 U.S.) a year, while the median salary for the same job in the U.S. is about $50,000 — but the cost of living is much greater in Europe! (The best job to get in Europe is a government job. The pay is great, so are the pensions and health benefits. I’m afraid America may be going the same route.)

The real concern here, and I hate to keep bringing it up, is interest rates. If Greece, Spain, Portugal and Italy default on their debt, interest rates in the euro zone will need to rise substantially to attract capital. This will put pressure on interest rates to rise in North America.

So, there is no question about interest rates rising globally. The real question is: when will the bear market rally that started in March 2009 call it quits? The stock market is the smartest investor in the world. It knows higher interest rates are ahead of us.

But, at the same time, I believe that the bear market has not finished its job of bringing more people back into the stock market. I remain in the camp that believes that the bear market rally has more room on the upside, European economic crisis or not.