|TheStreet.com, Summer, 2015. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
After a 350 point drop in the Dow Jones Industrial Average on Monday, investors are rightfully nervous about the fate of their portfolios. But, don’t fret, because it’s not going to be that bad — the S&P 500 will still hit 2,250 by year-end.
Major averages all lost around 2% on news that Greece would almost certainly miss its Tuesday International Monetary Fund payment and start the road of default and exit from the eurozone. Simultaneously, investors were greeted with news from Puerto Rico’s Governor that the U.S. territory would not be able to repay its $72 billion public debt.
Well, it’s bad, but so what?
Greece is not a new problem and while it may cause some additional short-term market volatility and pressure bond yields and currencies, the Mediterranean nation is hardly economically significant enough to cause any real global economic impact.
The risks of widespread contagion to other periphery countries has diminished meaningfully in the past few years, hence the risks to the overall eurozone is much lower. More importantly, the European Central Bank and central banks in individual countries are all prepared for such an exit and are heavily engaged or prepared to engage in market stabilizing measures — that is, bond and currency buying and other intervening methods.
With Puerto Rico the mark is being missed as well. Everything alarmists and analysts are stating is correct, but as is so often the case, also incomplete. Yes, Puerto Rico cannot declare bankruptcy and will therefore (technically) default on its debt. However, most of this debt is insured, so while the bond holders have seen a drop in the bonds values, they will continue to receive interest payments. Assured Guaranteed (AGO – Get Report) and MBIA (MBI – Get Report) are down sharply on the news, as they could end up making billions in “missed” payments to bond holders. In other words, don’t rush to buy Assured Guaranteed or MBIA shares, but don’t head for the hills when it comes to bond mutual fund that hold Puerto Rico debt because most of the damage has already been done.
While the Greek and Puerto Rican troubles are significant, they are most likely only going to impact a segment of the market as opposed to the whole system. For most investors, this means stay away from buying bond insurers or Puerto Rico bonds. There are opportunities in Europe, but investors should be prepared for a longer-term holding period to maximize the investment potential. Ultimately, Greece and Puerto Rico are mere background noise that will be trumped by economic fundamentals and corporate earnings growth. So, in spite of the headlines of an eminent debt default by Greece, I’m sticking with my year-end 2,250 target for the S&P 500.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.