The stock market once again showed its temperamental nature on Wednesday, falling back from yesterday's gains as the investing world refocused its attention away from solid earnings results from U.S. companies and toward Europe and the ongoing struggle over Greek sovereign debt. Despite good results from PepsiCo (NASDAQ:PEP) and a number of other key U.S. companies, stocks eased lower, with the Dow Jones Industrials (DJINDICES:^DJI) falling 53 points as of 12:45 a.m. EST. As worried as some people are about Greece, though, history has already largely debunked the idea that investors should panic over even a worst-case scenario for the cradle of European civilization.
Sound and fury signifying nothing?
A group of finance ministers from the 19 nations in the eurozone scheduled an emergency meeting today, with the Greek debt question at the forefront of their discussions. Newly elected Greek Prime Minister Alexis Tsipras has threatened to back out of the deal that Greece made to accept a 2010 bailout program from the European Union and the International Monetary Fund.
In particular, tensions grew as Germany's Wolfgang Schaeuble tried to put pressure on Greece to continue with the bailout provisions under their current terms. Yet with Tsipras set to meet with German Chancellor Angela Merkel tomorrow, Greece pressed back, noting the disparities between the stronger and weaker economies within the eurozone.
As a result of these growing difficulties, some analysts seem convinced that Greece will choose to abandon the euro. That, in turn, could cause the Greek economy to lose even more support. It could also encourage other weak-economy countries to consider leaving the currency union.
Yet those who panic at the first sign of potential Greek trouble forget recent history far too quickly. Back in 2010, many people believed that Greece would never accept a deal that would impose such dramatic austerity measures on their people. When push came to shove, though, the consequences of turning down international assistance turned out to be too great in the eyes of Greek government leaders, leading to the current deal. Despite loud rhetoric, threats of abandoning that aid are likely simply negotiating tactics to try to get more favorable terms.
Moreover, Greece isn't the only country that has ever faced sovereign debt troubles. Latin America was historically a hotbed of sovereign defaults, and even as recently as last year, Argentina sparked a new crisis by engaging in a "selective default" on its debt. As disruptive as these events can be, the global economy is resilient enough to take those risks into consideration as long as the shocks don't happen so quickly that they endanger the broader financial system.
Most of all, investors need to understand that favorable results from U.S. companies could send stocks soaring even if European troubles escalate. PepsiCo, for instance, climbed more than 2% this morning as the company's snack-food division helped it turn in a larger profit than most shareholders expected. Even as Europe's crisis has hurt the euro and made the dollar stronger, PepsiCo nevertheless remains on track to return billions of dollars to shareholders through dividends and stock buybacks, and similar moves throughout the U.S. economy continue to support stocks.
Current events can sound scary, especially given the level of uncertainty involved. But longtime investors know from experience that overreacting to those events only creates regret in the end. The smarter course is to stay focused on the long run while remaining prepared for whatever comes.