Dollars and Sense: Will trouble in Greece shake U.S. markets?

Greek turmoil. Expect the unexpected this week in the markets. A radical left-wing party vowing to end Greece’s painful austerity program won a historic victory in Sunday’s parliamentary elections. The party, Syriza, promised to end what its leader Alexis Tsipras called the “five years of humiliation and pain” Greece has endured since an international bailout saved the country from bankruptcy in 2010. That could mean the new government will default on its repayment plan and end austerity measures that have kept the country solvent. This news is definitely not what the shaky eurozone needed, and stock futures in both the United States and around the world have been trending downward since election results became available yesterday.

Earnings so-so. Even without this news, earnings here in the United States have been nothing to crow about. Airline stocks have reported record profits because of lower fuel costs, but some of the big banks, including Bank of America, have had disappointing results. The markets were generally up last week, but it wasn’t earnings driving the uptick. On Thursday, the European Central Bank announced it would launch a Federal Reserve-style Quantitative Easing (bond-buying) program designed to lift the eurozone out of its stagnation. ECB President Mario Draghi said the central bank would purchase as much as 60 billion euros’ worth of bonds by the end of 2016. Lots of people, especially conservative analysts, think these bond-buying schemes are a bad idea, but for a variety of technical reasons, the equities markets like them.

European troubles. Of course, the European Central Bank had to make this unusual move because of economic trouble in Europe—and that was before the Greek elections muddied the waters further. Last Monday, for example, we learned Russia’s economy will shrink by a far worse-than-expected 4.8 percent this year. Falling oil prices and Western sanctions against Russia for its heavy-handed actions in Ukraine are causing the decline. Capital also is fleeing the country as investors bail out of the rapidly declining Russian ruble. Net outflow from Russia more than doubled in 2014, to more than $150 billion. Russia is not a eurozone country, but it is a significant trading partner with some of Eastern Europe’s struggling countries, so problems in Russia hurt them.

A global slowdown. The collapse in Russia was a contributing factor in the World Bank’s announcement last week that the global economy would grow at a slower rate in 2015 than had been previously projected—3 percent. Earlier projections had growth at about 3.4 percent. The International Monetary Fund predicts a somewhat stronger 3.5 percent, but it recently downgraded its projections, too.

The week ahead. Earnings season continues. We’ll get both a durable goods report and a consumer confidence report on Tuesday. We’ll also get the government’s first estimate of the fourth quarter gross domestic product number on Friday. So there’s going to be plenty this week to keep analysts analyzing and traders hopping. Now, of course, the reaction to the Greek election also will play a major role. Earnings reports, which have so far taken something of a back seat to all the news out of Europe, could jump back into the spotlight. We should start to see some trends emerge, and those trends should tell us whether stock prices, which remain at near-record highs, will continue their bull run, or whether all this European uncertainty will finally take its toll on the U.S. markets, too.

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