Stock Market Watch: It's Up! It's Down! But Why?

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Markets around the world have taken a few steps back in the past month, and there are a number of factors contributing to this newfound fear among investors. The debt crisis in Europe is, of course, the obvious event to point a finger at when explaining the recent market stall and decline. And a depressed Euro along with the Gulf oil spill are further adding to the instability. But there is one factor quietly lurking in the background that has been impacting the markets more than you might think.
 
First, let's take a look at the more apparent culprits.
 
European Economic Crisis: Most will say the governments of Greece, Ireland, Spain, Portugal and Italy are in no worse financial shape than the U.S. government, and in some cases that is true. There are two exceptions. Unemployment in some of these countries is approaching 20 percent. This means far fewer workers to contribute tax dollars to government coffers, and far more workers who are now drawing unemployment benefits from those same coffers. 
 
Second, decades of lax tax laws and collection policies have led to financial chaos in Greece. The current system of tax collections and reporting, in some cases, involved complete disregard for the laws. Other laws were so opaque, enforcement precedent was never set.
 
The Euro: It is under serious pressure, and will continue to be for some time. It’s difficult for each country in the European Union to speed up or slow down their individual economies when interest rate policy and money supply are controlled by a central body that is trusted to juggle the needs of all members. 
 
Countries such as France and Germany--where the economies were starting to see growth--should be thinking of when to raise interest rates. Those countries mentioned above who have not yet recovered need to have those very same interest rates held steady or even lowered. 
 
The Euro decline does bode well for Germany and other Euro-zone economies with a large export sector. A weaker Euro means goods are cheaper to export. But this is only a small upside to a weak Euro.
 
What about the Gulf oil spill? The oil spill actually doesn’t contribute to the recent market pull back in a direct way.  It’s not wide spread in geographical or industrial terms. Those in Louisiana, Alabama, Mississippi and the Florida Panhandle will likely disagree, but this event is purely psychological in the minds of investors.  True, it is impacting the waterfront hotels and beach rentals who are reporting cancellations due to the oil spill. And it will also disrupt the fishing and boating industries. But it is not on the scale of subprime mortgages or exceedingly high unemployment.
 
The Quiet Influence: And this very unemployment number in the United States--still around 10 percent--is the hidden factor in the markets stalling and pulling back. Companies are running much leaner now than in the past and they are doing it with a significantly reduced work force. Until businesses start to hire in measurable numbers we will not see a sustained march higher in the markets. Jobs create demand for all goods and services and as of now that demand remains low. 
 
So while companies may be still reporting good earnings numbers and real estate may be leveling off, to grow economically from here the unemployed U.S. population needs to find work.
 
Nick Wychocki works for Global Wealth Consultants, a registered investment advisory firm, as their Senior Wealth Strategist.  He has worked there for six years in beautiful Naples, Fl., after having cut his teeth in the currency options pits of the Chicago Mercantile Exchange. He is a CFP certificant and a graduate of the University of Florida’s MBA program.
 
Read more from Nick on managing finances as a couple.
 
(Photo credit: Katrina.Tuliao; C.C. 2.0)