US stocks approached the March 16th levels that marked the YTD low, and also the start of year values. Given that stocks peaked 6 weeks earlier with a YTD rise of 9.0%, our clients have called wondering if this slide marked the start of another financial meltdown. Thankfully, no! As we have remarked several times already this year. US stocks are fairly to slightly overvalued during a slowdown in world economic growth due to supply chain problem following the Japanese earthquake and tsunami, poor job numbers in the US, elevated oil prices following unrest in the Middle East, particularly Libya, rising interest rates and inflation fears in emerging markets such as China, and last and of least concern to us, the effective bankruptcy of Greece.
We remain sanguine because interest are low and will remain low for the short and medium term; there is much labor and capacity slack in developed economies, so inflation is not a threat; last and most important to us, the world's banks have deleveraged substantially in the last two years. Why does that matter? Less leverage means more capital means more resilience to absorb probable losses in Greek debt, and possibly also, Spanish, Irish and Portuguese debt. Sovereign debt crisis seem to occur every fifteen years (Latin America in the early 1980's, Asia in the late 1990's, Europe now) as bankers, credit agencies and investors apparently have short memories. If Greece in fact defaults, some European banks will lose some money but will not lose all their capital as we saw in 2008 among Bear Stearns, Lehman Brothers, AIG and certain European banks.!