Stock markets have been swinging wildly of late. Even though corporate earnings have shown strength over the past year and not all economic indicators have been gloomy, investors are on edge. Uncertainty looms on several fronts – from concerns about the basic health of the economy to doubts about fiscal policies in the United States and Europe. Here's a look at the forces weighing on investors' outlook:
If you're a market bear, Europe is the gift that keeps on giving. One day leaders announce some step forward, the next day it's often two steps back as financial analysts renew their doubts about whether high-debt members of the currency union will be able to service their debts.
A key problem – already visible in Greece – is that austerity measures designed to put the fiscal house in order simultaneously suck wind out of the economy. Consumers (many of them paid directly or indirectly by the government in the past) have less to spend; businesses think about moving elsewhere; and tax revenues don't increase along with tax hikes. Stock market jitters rise as policymakers grope for a solution.
The problems are not insurmountable, but the options come with political and economic hurdles. One is to see weak nations default and exit the euro zone entirely. Another is to restructure their debts – with bondholders taking "haircuts" or losses. Those bondholders are in many cases private sector banks, which might then need rescues along the lines of what happened on Wall Street in 2008, with the Treasury's Troubled Asset Relief Program (TARP) fund. Another option for the eurozone is to try to keep muddling along with austerity measures in countries like Spain and Italy matched by rescue funds from the likes of Germany and the International Monetary Fund.
At least things aren't so bad in the US, right? Maybe, but ...
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