It’s not unusual to lose your balance while standing on a peak.
And so it goes with the stock market. Investors suffered some fear of heights earlier this week and sent the Dow Jones industrial average tumbling. Monday was the worst day of this year, with a triple-digit decline amid a powerful five-week rally. But after second-guessing that rally for a few hours, investors decided Tuesday that they are still on solid ground.
Investors feel compelled to give more attention than they otherwise might to anything that could unseat stocks. European debt issues became that preoccupation Monday, as the agreements forged last year to help indebted nations such as Spain, Italy and Greece looked like they might become unhinged by changes in the political landscape.
Until this week, Europe had faded from investors’ consciousness. Investors assumed the eurozone would make it through its debt crisis when European Central Bank chairman Mario Draghi promised in July to do “whatever it takes.”
Both U.S. and European markets have been climbing since then, except for a short twinge of worry after the presidential election, when investors thought Congress would send the U.S. over the fiscal cliff and into recession.
But now politics and scandal in Europe could shake the agreements that were so reassuring to Europe. In Italy, with an election looming this month, major issues have been lax supervision of troubled banks and unpopular austerity measures and reforms. Draghi has received some flak because he previously was governor of the Bank of Italy, a bank regulator. But investors seem to be particularly focused on the possibility that former Prime Minister Silvio Berlusconi could be elected, and that he will balk at the austerity measures that other European leaders insist Italy adopt if the country is to get aid.
In Spain too, a key player in working out an agreement with Germany and other countries for a bailout is being challenged. At the center of a scandal over alleged illegal party finances is Prime Minister Mariano Rajoy.
He has denied any wrongdoing, but as investigations continue, the markets fear a political change in leadership or the election of leaders who would not support bailout requirements imposed by European countries.
In such a case, the issue is whether banking and debt problems could undermine stability at home and potentially globally again.
Reports from Europe this week “reminded investors (if only for a day) that, while the worst of the sovereign credit crisis in the European periphery appears to have passed, Europe is by no means out of the woods,” said Clark Yingst, chief market analyst for Joseph Gunnar & Co.
“Work on structural reforms, necessary if Europe is to compete in an increasingly global economy – but also imposing additional pain on the populace and thus politically unpopular – appear to have stalled.”
European banks are still fragile and in need of help, which was obvious recently when the Dutch government provided a bailout to a major lender.
Capital Economics economist John Higgins said he thinks the eurozone crisis will flare up again in the second half of this year.
But while Europe’s political issues unnerved investors briefly this week, U.S. investors relaxed Tuesday when they focused on home turf and the business environment. After all, the major lesson for investors in 2012 was that despite a lot of hand-wringing about government debt catastrophes that were feared in both the U.S. and Europe, politicians eventually stepped up at the last minute to avert disaster.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her email at gmarksjarvis@tribune.com.
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