Europe

The Lehmann Letter (SM)

The stock market fell sharply today, and most commentators attributed the drop to events in Europe. Pessimists fear that Greece's debt problems are an omen of what will befall Europe as Portugal, Spain and perhaps other nations threaten default on their debts. Sovereign debt defaults would imperil the banks that hold those debts and might plunge the world economy into another financial crisis and recession.

But it's difficult to believe that the European Union will let that happen. While it is true that Germany has expressed reluctance to bail out Greece, not coming to Greece's rescue would be calamitous. World markets have made that clear.

Moreover the nations of Europe have done a wonderful job since the end of World War II of drawing together in order to mold their collective future. The European Union and the euro are the chief examples. Time after time Europe has overcome obstacles and improved its political and economic well-being. There has been back and fill, but in the end they have met the challenges. It is likely they will do so once again.

That observation leaves another possible explanation for the recent stock market slump. Perhaps, hidden behind the news of Europe, is the realization that momentum may have carried the stock market too far. Is the outlook for earnings and the economy as rosy as the recent market run-up seemed to indicate?

© 2010 Michael B. Lehmann