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Mark Hulbert
April 28, 2010, 12:01 a.m. EDT · Recommend · Post:
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- The difference between a tragedy and a comedy, I was taught in Classics 101, is that, in the latter, the hero wakes up in time.
I take this to mean that it's premature to label the current fiscal crisis in Greece as a tragedy, as many commentators nevertheless are already doing. It might in the end turn out to be a tragedy, but it doesn't have to.
This is especially worth remembering after a day in which the stock market plunged as Greece's debt was freshly downgraded (this time to "junk" status). The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,992, -213.04, -1.90%) fell by more than 200 points, or 1.9%. The S&P 500 had an even worse day in percentage terms, shedding 2.3%.
But investors can't really have been all that surprised by the downgrade of Greek debt -- or at least shouldn't have been. John Dessauer, editor of an investment advisory service called John Dessauer's Outlook, argued in an interview last week that it was almost certain that Greece would end up defaulting on its sovereign debt, either outright or de facto.
In any case, Dessauer furthermore argued, the impact on the world economy of an outright Greek default would be fairly modest. That's because the damage to world trade inflicted by the Greek crisis has already happened -- and for the most part has been already priced into the level of the stock market. ( Read my interview with Dessauer.)
Dessauer's point is confirmed by a recent analysis I conducted of the stock market's reaction to past sovereign debt crises. Interestingly, Greece's sovereign debt crisis is hardly unique. And the stock market on average has performed quite well in the wake of past such crises.
Over the last two decades, I counted at least four major sovereign debt crises:
The Mexican peso devaluation and associated crisis, which began in December 1994.
The so-called "Asian Contagion" that began in July 1997, when a government debt crisis in Thailand led to a run on its currency. That in turn precipitated similar crises throughout the region, leading many to fear that the crisis might eventually spread around the world.
The Russian ruble devaluation in August 1998, which led to (among other things) the bankruptcy of Long-Term Capital Management
The Argentine government debt/currency crisis that began in November/December 2001
The accompanying chart is based on a composite of how the stock market reacted following all four cases, with 100 representing the stock market's level when those crises first broke onto the world financial scene. On average the stock market was 17% higher in one year's time (as measured by the Wilshire 5000 Total Market Index).
The chart also shows how, on the same scale, the stock market has reacted so far to the Greek crisis. Notice that, more or less, the stock market is following a similar script. In fact, even with Tuesday's big drop in the stock market, it nevertheless remains ahead of the average experience in the wake of the four prior debt crises.
This analysis doesn't amount to a guarantee that the stock market will perform as well this time around, needless to say. There is a big leap of faith involved in extrapolating from this -- or any -- historical analysis, especially one based on a sample containing just four examples.
Still, this analysis does serve to remind us that the negative impact of a sovereign debt crisis, scary as it otherwise may be, can also be exaggerated.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of investment advisory newsletters. The HFD became a service of MarketWatch in April 2002. In addition to his regular columns for MarketWatch, Hulbert writes a column on investment strategies for the Sunday New York Times, a monthly column for Barron's.com and a column on newsletters for the Journal of the American Association of Individual Investors. Dow Jones and MarketWatch are launching a weekly newsletter, Hulbert on Markets: What's Working This Week.
SAN FRANCISCO (MarketWatch) -- It's been an amazing run. Now comes the hard part.
5:13 p.m. April 27, 2010 | Comments: 32
- notworst | 12:35 a.m. Today12:35 a.m. April 28, 2010
"Mark Hulbert: What Greece means for the stock market http://on.mktw.net/ausRx6" 12:16 a.m. EDT, April 28, 2010 from MktwHulbert
"Mark Hulbert: Wall Street cheer absent on Main Street http://on.mktw.net/cj8zfw" 11:48 p.m. EDT, April 26, 2010 from MktwHulbert
"Mark Hulbert: Forecaster who called euro troubles weighs dollar http://on.mktw.net/cmxZ76" 11:36 p.m. EDT, April 22, 2010 from MktwHulbert
"Mark Hulbert: A rare buy signal with a good record http://on.mktw.net/ahj6nN" 11:28 p.m. EDT, April 20, 2010 from MktwHulbert
"Mark Hulbert: Sentiment, not Goldman, at root of gold weakness http://on.mktw.net/cULdQh" 11:42 p.m. EDT, April 19, 2010 from MktwHulbert
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