Don't look now, but the next European crisis might be knocking on the door, and the result might not be pretty for the U.S. stock market.
Since the European crisis supposedly ended in 2012 — or at least dropped off the radar screen — debt levels on the continent have actually continued to rise, notes
Chris Puplava, portfolio manager at PFS Group.
To make matters worse, European economic growth is likely to slow into 2015, he writes on the Financial Sense website.
He thinks that it all adds up to problems for the domestic U.S. financial markets before year-end.
"With the markets surging to new all-time highs, now is as good a time as ever to start asking 'What could go wrong?' Chief among market risks in my mind stems from across the Atlantic over in the eurozone," Puplava said.
Investors have been lulled into complacency during the past couple of years mostly because the European Central Bank flooded its balance sheet from about 2 trillion euros to 3 trillion euros and put a lid on bond yields there, in Puplava's view.
At the same time, International Monetary Fund data show government debt as a percentage of GDP has grown across the eurozone since 2012, with only Germany showing a contraction. Greece and Spain, the supposedly former basket cases, have seen their debt-to-GDP levels rise the most, with Italy and Spain not too far behind.
"The reason for the continued erosion in the region's financial position despite a cutback in spending comes from a poor economy. When households in Europe cut back on spending, as does the government, there is no one left to pick up the growth baton and overall economic activity decelerates even faster than the cutback in spending," Puplava wrote.
He cited Bloomberg data showing Eurozone growth may now be "rolling over" as leading indicators suggest the region's GDP might continue to fall well into 2015. Puplava's conclusion is that default risk is likely to rise in the European periphery nations, which could be contagious.
"Should European equities fail and continue to head south, the U.S. market may get pulled down with it despite bullish seasonal tendencies into year-end," Puplava wrote. "
His prediction: "Given European growth is expected to decline well into 2015, we are likely to see another round of the Euro crisis occur which could derail strong bullish seasonal strength the U.S. market typically sees in the last two months of the year… While things look rosy in the U.S. with our markets hitting new all-time highs, investors would be wise to keep a watchful eye on our friends across the Atlantic.
Washington Post columnist Robert Samuelson noted that while Americans bemoan their own slowly growing economy, Europeans have had it worse in recent years.
"Europe resembles a patient with a chronic condition. Sometimes the patient's health gets a bit better, sometimes a bit worse, but the illness persists and constantly threatens to cause acute, possibly catastrophic distress," Samuelson wrote.
He cited research from Dartmouth economist Matthew Slaughter showing about half of the international profits of U.S. multinational firms originate in Europe. "If these weaken, so could U.S. stock prices and the consumer spending and confidence tied to the market," Samuelson noted.
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