The sovereign debt crisis in Europe has been going on for years now. Yet despite having taken a long time to expand from its small beginnings across the continent and filter down through government budgets into the broader economy, you can clearly see now the way that the crisis has slowed down the pace of European economic activity.
Even though the stock market's daily movements often get blamed on what's going on in Europe, the impact that Europe has had so far on U.S. stocks has been fairly muted in most cases. But signs point to that resistance starting to disappear, and having avoided big losses, some exposed stocks in the U.S. could start feeling more pressure on their share prices.
Feeling ill
The spread of contagion across Europe has been slow but steady, and some of the last bastions of strength now find themselves under siege. Credit ratings agency Moody's targeted the top-rated sovereign debt of Germany, Luxembourg, and the Netherlands for a possible downgrade, lowering its outlook to negative as it indicated increasing concern about the way the crisis has expanded in scope recently. With fears of Greece abandoning the euro and the much larger potential problems of Spain and Italy rising to the forefront, Moody's expects that a falling tide will sink all ships, pulling even the strongest economies down into the mess. The move left Finland as the only remaining top-rated sovereign debt with a stable outlook.
Just like the U.S. downplayed the relevance of S&P's decision to downgrade its credit from AAA status, the German government predictably argued that Moody's move would do nothing to change Germany's leadership role in supporting the eurozone's economy. But investors seem now to realize that attempts to isolate the problems to small parts of the European community have failed, and they're considering how those problems could spread across the Atlantic and beyond.
The carriers
The means by which Europe's woes could get transmitted to the U.S. stock market is most likely to come from U.S. multinationals doing business there. In particular, a Barclays note cited in Barron's identified several companies whose exposure to Europe could cause problems for investors.
Interestingly, though, the Barclays note focused not on stocks but rather on credit risk in assessing the impact of falling revenue from Europe. For consumer-goods companies Avon Products (NYSE: AVP) and Procter & Gamble (NYSE: PG), the combination of slower sales and foreign exchange pressures have the potential to hurt overall results. With P&G now having to deal with activist investor Bill Ackman and Avon trying to restructure its troubled worldwide operations, both companies may take actions that jeopardize bond investors, such as selling assets or having to tap more expensive financing options.
Meanwhile, Motorola Solutions (NYSE: MSI) relies a lot on governments for its revenue, which could be particularly problematic as that leaves the company on the front lines of sovereign-debt woes in Europe. On the other hand, Deere (NYSE: DE) has plenty of problems closer to home to add to Europe's slowdown, with the current drought threatening the strength of the agricultural sector. And Expedia (Nasdaq: EXPE) may want to buy out Liberty Interactive's big stake in the company, which would increase leverage levels and raise credit risk.
Should stock investors care?
Despite all this bad news for bond investors, the question remains how they may filter down to shareholders. In many cases, what's bad for bondholders is even worse for shareholders, as anything that jeopardizes a bond's payout potentially leaves shareholders penniless. But often, certain actions boost the chance for an outsized gain in the shares at the expense of bondholders, and that's what Barclays argues is happening in some cases.
The more important point, though, is that as Europe gets worse, companies like these around the world are feeling the bite and having to respond to defend themselves. Regardless of whether any particular action helps bond or stock investors more, there's no denying that the impact on the overall company is there, and that bodes ill for all investors.
Keep your eyes open
Years into the crisis, there's no sign of Europe's problems going away anytime soon. The key now is to realize that your U.S. stocks aren't invulnerable to Europe's woes, and the sooner you get a handle on exactly how much exposure you have to Europe, the better you'll be able to deal with that risk.
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