Foster Group

The Euro, at its inception in 1999, was looked upon favorably by most.  This shared currency among the countries belonging to the European Union was thought to be a fast-track to a stronger economy for the continent, improved collaboration throughout the region, porous trade borders and increased efficiency in tourist spending.  Now, a decade later, we find several countries teetering on the brink of bankruptcy, another few in troubled waters, the world watching and markets whipsawing.

Where did this seemingly "great" idea go so wrong?  Simple; shared monetary policy but no corresponding shared fiscal policy.  They agreed on what to use, but not how to do so responsibly.  The Euro was an invitation to mis-manage spending rather than drive economic development; doomed to fail from the start.  The little guys (Greece, Portugal, Ireland, etc.) obviously saw this as an opportunity to play with the big boys.  Keep in mind the biggest of those boys – Britain – declined at the inception to participate in the Euro game.  Recently, they again declined to participate in a treaty to more closely align fiscal measures.  They are taking a bad rap from socialist societies with historical unemployment rates averaging over 8%, in order to protect their sovereignty and not be brought down by other countries’ irresponsibility.  Hard to blame them, but it certainly puts a crimp on resolving the problem in the short-term.

While the world watches, and to some degree offers their helping hand, Europe may continue to dictate market volatility over the coming weeks and months.  Many investors find this reason enough to exclude international equity exposure from their portfolio.  Many of those same investors found the economic downturn in 2008 to be reason to detach from stock exposure, effectively locking in losses and missing a historic rally in prices that began in early 2009.  Volatility is a fact of life as an equity investor.  Markets are forward-looking; they have already priced into equities an assumed outcome of the European mess with all public information currently available.

America has learned some lessons over the past few years.  Hopefully, we’ll stay attuned to those and maintain our changed behaviors.  Ideally, Europe will do the same as they sort out their collective mess.  As investors, we need to conduct our own introspection and ensure that we’re learning as well . . . not to over-react to the perceived incompetence of governments world-wide.  Equity markets will go up, and down, and repeat.  That's my bold prediction for the year.  Just remember - when they go down, those of us who choose to maintain our exposure are being offered more in future expected returns for putting our capital at risk.  Stay diversified.