With earnings season off to a rocky start, the last thing the American markets needed was a jolt from the tumultuous European debt crisis. Yet, after a few weeks of relative calm across the pond, risk was back on the table as Spanish bond yields hit a new euro-era high. The new development sent global markets tumbling, with all three of the major American indexes down at least 1%.
|Dow Jones Industrial Average (INDEX: ^DJI )
|S&P 500 (INDEX: ^GSPC )
|Nasdaq (INDEX: ^IXIC )
Source: Yahoo! Finance.
Euro crisis awakens
A trifecta of unimpressive news emerged out of Spain recently to reopen a festering wound. Initially, the auction of Spanish bonds last week revealed particularly disappointing demand from the broader market, which had largely been supported by domestic banks. Investors continue to seek so-called safe havens like U.S. Treasuries.
Europe was dealt another blow when Spain announced its economy contracted 0.4% during the three-month period ending in June. This was slightly worse than the 0.3% contraction experienced during the first three months. On an annual basis, the Bank of Spain noted that the economy had contracted 1%.
The Spanish economy is not quite in a free fall, but things aren't getting better, either. The country is expected to remain in a recession until 2014, meaning the pressure on the European Central Bank will continue for quite some time.
Earnings add to despair
Stateside, a few Dow components continue to report earnings. The world's largest hamburger chain, McDonald's (NYSE: MCD ) didn't help matters when it announced on Monday. Management revealed a dip of 4% in net income in the second quarter, driven by soaring commodity costs and unfavorable exchange rates. Similar to Chipotle's (NYSE: CMG ) report on Friday, McDonald's witnessed a slowdown in consumer demand. The unstable jobs outlook certainly isn't driving customers to restaurants -- even at the low end of the spectrum.
Risk-on, risk-off continues
During earnings season, investors need to realize that the instability in the markets will remain. Europe, the U.S., and other international indexes will respond violently to the short-term fixes revealed by the central banks, weak or strong economic data, and myriad other news. Keep in mind that the daily rallies will not prove sustainable if driven by short-term remedies, so focus on the companies that will experience strong demand over the long haul. For a few ideas, take a look at our special free report, "3 Stocks That Will Help You Retire Rich." Avoid sleepless nights by downloading your copy now.