News

Stock markets around the world have been under substantial pressure for several weeks. U.S. equities, as represented by the Dow Jones Industrial Average and the Standard & Poor’s 500 Index, are some 10% below their 52-week highs achieved just one month ago. Indeed, all those successive weeks of gains in March and April that led to the highs are long forgotten, with the Dow and S&P now showing year-to-date declines of 2.3% and 2.5%, respectively. The sustained retreat and the intraday volatility can largely be attributed to the fear and uncertainty stemming from the crisis (of debt and confidence) in Europe, with all of the positive developments elsewhere around the globe being completely overshadowed by the noise and pictures emanating from Greece. Considering the bottom-line implications of that large economic zone’s inevitable retrenchment, however, it’s difficult to argue that the stock market’s upheaval isn’t justified.

The recently announced $1 trillion backstop notwithstanding, governments in Greece, Portugal, Spain, and many others will have to spend far less in the years ahead than their populations have become accustomed to over the past several years. Some have begun to implement austerity programs, which will undoubtedly suppress demand for all sorts of goods and services. This will put pressure on prices, too, further squeezing revenues, margins, and profits. For U.S.-based multinational companies, Europe’s economic travails will have a double whammy in that whatever business is transacted there will probably translate into fewer American dollars (with the euro down substantially in recent weeks). The reduced aggregate foreign demand will also inhibit domestic employment, consumption, and macroeconomic activity. All in all, corporate earnings will likely be hurt and the multiple that investors will pay for those earnings could compress.

There is no safe haven, but investors would probably do well to focus on the stocks of companies that have minimal exposure to European markets and more to the faster-growing economies of Latin America and Asia. Among the stocks in 3DR’s “active” portfolio, ITT Educational Services has no exposure to international markets. In fact, it could actually be a beneficiary of the turmoil abroad, since the unemployment rate in the United States is unlikely to fall meaningfully when governments and consumers in many parts of the world are retrenching. CVS Caremark and UnitedHealth also have negligible direct exposure. The others will undoubtedly be hurt to varying degrees. All that said, as was the case through much of 2009, investors may want to take advantage of the current dislocation to upgrade the quality of their portfolios.