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The latest banking crisis in Europe, this time in the tiny island nation of Cyprus, shows that the continent has not yet truly solved its financial problems. The European economy has only applied a series of band-aids that have temporarily averted disaster, but have not yet provided a firmer long-term footing for the Euro-bloc. There could be another crisis of confidence at almost any time, with Italy and Spain being the most likely instigators.
That’s the bad news. The good news is that the U.S. stock market is not being affected very significantly by the doings across the pond. Unlike the fall of 2011, when every negative headline out of Europe sent the U.S. markets into freefall, by now our markets have become more inured to the continent’s crises du jour. The recent headlines from Cyprus pushed the U.S. markets down for short periods, but they generally rebounded quickly and strongly. Moreover, in contrast to 2011 when a headline-induced market decline would drag down virtually all stocks, recent market dips have been much less broad-based, with many winners to be found among the losers.
Maybe the stock market has already priced in most of the ultimate negative outcomes in Europe. Or maybe we’ve figured out that Europe’s problems don’t have that much effect on the U.S. economy or markets. For example, in 2011 a problem with a European bank would send the stock of a Midwestern U.S. regional bank reeling even though that bank had almost no exposure to Europe. Over the last few weeks, the U.S. regional bank would only have dipped slightly along with the broad market. (For more of our thoughts on U.S. banks, see the upcoming April issue of The Turnaround Letter.)
This means that our stock market is once again being driven by fundamentals rather than headlines, and this is a good thing for investors. It is much easier to analyze a company’s fundamentals than to predict what tomorrow’s headlines will be. The U.S. stock market may continue to rise in the coming months, or it may fall, but at least it is behaving in a more rational manner.