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Will Europe Curb Market Rally?

Stocks tumbled Wednesday on news of a weak Spanish bond auction, but many advisers contend that – unlike last fall – this time the stock market may be able to rally through the continued financial crisis in Europe.

The Dow Jones Industrial Average fell 124.80 points Wednesday to 13074.75 and the Standard & Poor’s 500-stock index fell 14.42 points to 1398.96. But that doesn’t necessarily mean the gains from earlier this year will be wiped out, advisers say. The U.S. economy has much going for it: a steadily improving job market, including the 209,000 private-sector jobs ADP says were added in March. Car sales are up again and some Federal Reserve officials said at their last meeting the economy may  not have as much slack as previously thought. Before drastically pulling back on their equity exposure, investors should wait to see how other European countries fare, says Morgan Stone, a financial planner in Austin. “If Europe continues to stay on the back burner, I think we will continue to have a slowly improving stock market,” he says.

In fact, the pullback in global stock markets over the past couple of days could present a buying opportunity for long-term investors, advisers say. Brian Kazanchy, a wealth manager at RegentAtlantic Capital in Morristown, N.J., says investors who want to buy European stocks should focus on multinational companies like Siemens AG and Bayer that benefit from stronger growth in other countries.

To be sure, some investors are taking a more cautious approach. Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Fla. is cutting back on stock exposure and moving clients into corporate bonds and floating-rate bond funds, which he says should help shield investors against inflation. Other advisers are taking gains after the strong stock market run of the first quarter. Some are concerned the labor improvements we’ve seen so far this year may not last, a misgiving Fed officials mentioned at their last meeting.

With that in mind, investors should be aware how much exposure they have to European stocks, which are likely to remain a volatile presence in most portfolios, says James Daniel, a financial planner in Alpharetta, Ga. International stock funds have seen their average allocation to Europe increase by nearly one percentage point over the past six months to 54% now, according to data from fund research Lipper. Some funds have had bigger increases. The Fidelity Overseas fund (FOSFX), for instance, has 78% exposure to Europe, up 8 percentage points from six months ago. And the Oppenheimer International Value fund (QIVYX) is 68% invested in Europe, up 13 percentage points.


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    • The short-term outlook of many investors never ceases to amaze me. They really believe Europe’s current recession will last forever. This is ridiculous. All recessions eventually end, and this one will be no different. And when it does end, everyone who sold their stocks today will have missed out on the inevitable future gains.

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