Greece Fire

Some Fridays have more good news to share than others. Today – one day after a record intra-day point drop in the Dow – fits into the latter category. Was it caused by a “fat finger” (a technical glitch) or fears that contagion from Greece’s debt will spread to other countries, threatening the euro? The drama playing out in Europe eclipsed this morning’s blowout report from the Bureau of Labor Statistics that employers added 290,000 net new payroll jobs last month including 231,000 in the private sector. It was the best performance since February 2006 and well above the consensus for 175,000. On any other day, this might fuel a big stock market rally, but today, traders are focused on events overseas.

I was struck by editorials in today’s New York Times and Wall Street Journal that were in basic agreement, which is news in itself.

  • In the Times, Nobel prizewinning economist Paul Krugman asks, “So, is Greece the next Lehman? No. It isn’t either big enough or interconnected enough to cause global financial markets to freeze up the way they did in 2008. Whatever caused that brief 1,000-point swoon in the Dow, it wasn’t justified by actual events in Europe.” Click here to read the full article.
  • The Wall Street Journal states, “… there is no good reason that sovereign debt problems in a country that represents only 2% of the EU economy should send the world into another financial crisis and recession… The world banking system is far stronger than it was two years ago, and… the world economy is also stronger than it was in 2008.”
  • It’s not unusual for financial markets to disconnect from economic fundamentals for periods of time. Consider the 23 percent plunge in the Dow on October 19, 1987 (Black Monday). The economy continued to expand, and employers continued to add jobs at a rapid pace for another 2 ½ years by which time the stock market had recovered its losses.

The 290,000 jobs added to payrolls last month is good news for commercial real estate because it shows that occupier demand for space is heading in the right direction. Financial markets remain fragile as the problems in Greece and the euro zone illustrate, but they don’t preclude a continuing recovery. It serves as a cautionary tale on two fronts:

  • Investors should not abandon their analytical rigor as they compete for bargains in commercial real estate and other assets.
  • Eventually the U.S. must get its own fiscal house in order.

Robert Bach
SVP, Chief Economist
Grubb & Ellis