Stocks Tumble, Uncertainty Rises

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The U.S. stock market took a wild ride Thursday as the DOW index of stocks fell 1,000 points at its lowest and ended the trading day down 347, or more than 3%.  The economic concerns of the day centered on the turmoil in Europe as Greece needs a bailout to avoid default on its public debt.  However, the Securities and Exchange Commission (SEC) is investigating unusual trading activity to determine whether mistakes or manipulation caused a rapid drop of stock prices shortly after 2:30 p.m.

The crisis in Europe is serious.  Greeks have been rioting for several days over the economic hardships that are being imposed, as the government seeks to rein in public spending and convince European nations that it will show fiscal discipline, if given a new loan package.  Skeptics believe that even with new loans and belt tightening, Greece will eventually have to restructure its debt.

However, Greece is a small nation and its economy is only a small fraction of Europe’s economic power.  The market’s concern is that Greece’s problems might also surface in larger European economies such as Portugal, Italy or Spain.  Not unlike the U.S. bailouts to financial institutions in 2008, European governments today are stepping in to stop Greece’s failure from spreading.

While the decline in Greece is in itself too small to negatively impact the U.S. economy, greater weakness in Europe could hurt U.S. export sales and overall confidence in the recovery.  On the other hand, the U.S. stock market has risen dramatically since the financial crisis abated.  It may simply have been due for a correction.