Looking for Bad News in Greece and China

There are times when investors want to find reasons to see the glass as half-empty—looking for some issue or problem to confirm our fears and justify scaling back our positions or becoming more conservative in our investing. Last week was one of those times. It should have been a good week for stocks, between Bernanke’s reconfirmation, better-than-expected corporate earnings and a +5.7% jump in GDP for the 4th quarter, the most in six years. Instead, we saw sharp declines in stocks around the world from Tuesday through Friday. The two most obvious scapegoats are Greece, with the possibility of its national government defaulting on its debts, and China, which intends to curtail its own economic growth over fears of future inflation.

Analysts and stock market reporters can write much better stories by looking at what happened (stocks fell) and trying to explain why it happened (people were scared about Greece and China) rather than addressing the real issue—investors are still scared of being burned, and are looking for every reason not to invest, even if they are not good reasons.

We haven’t seen a national government default since Argentina in 2002. Before that we saw Russia and Ecuador in 1998 and North Korea in 1987 (that last one must have been a real shocker!). And though there is a slim possibility that Greece could default on its debt, I find it hard to believe, especially in view of recent statements, that the other EU nations will let this happen and endanger their monetary union. It is hard to say what effect an EU bailout of Greece would have on the US stock market, but the distant possibility of a foreign default is not reason enough for investors to shy away from investing when conditions are otherwise as promising as they were last week.

With China, why is it such a big problem if the government there wants to ease growth from too fast to just fast enough? Might they overshoot and slow the economy more than they would like? Of course they could, but their recent actions to rein in lending were triggered by data showing that the Chinese economy has been growing much faster than expected. Even investors in “China-sensitive” stocks, such as energy and materials, must have been surprised by 2009’s upwardly revised GDP figure of +8.2%. China’s economic growth rate had actually been accelerating throughout last year. The rest of the world should be so lucky.

Make no mistake, I am not saying that the possibility of Greece defaulting or China’s future economic growth slowing a little too much should not be considered in our decisions today, because they could affect our global economy and equity markets. I just question the sudden and indiscriminate selling of securities amidst the reality of better than expected economic news and corporate earnings reports on the basis of “what-if” scenarios that probably won’t ever happen.