Investors large and small are watching a spectacular financial fire rage across Europe, with Greece headed for either all-out default or a painful restructuring of its debt, and fellow members of the European Union in earlier stages of their own crisis. (As of Tuesday afternoon, the leaders of the European Union were announcing their fifth swing at a bailout package but many investors expect that even if it happens it will only buy time for Greece, not end its crisis.) In the U.S., meanwhile, the stock market posted its best one-day gain in almost two months, as strong earnings reports and a few upbeat economic signals gave investors just what they were looking for—a reason for optimism. The S&P 500 was up 1.3% as it neared the 4 o’clock close, and the Dow had risen by nearly as much, trading up 119 points at 11, 164 as strong earnings reports from Motorola and Pfizer and Merck helped draw in investors.
Is it odd that the U.S. rallies while Europe’s crisis seems to grow worse? Not really. The Euro crisis has boosted demand for the safety of U.S. securities. The U.S. Treasury was one beneficiary, having just wrapped up an auction of seven year notes that was three-times oversubscribed, according to the Wall Street Journal. Meanwhile, even though the yield on Greek 10 year notes was up around 10% in the past 24 hours, that’s well shy of what institutional investors would want before they’d dip their toe in Greek markets. There is also trepidation about credit risks in Portugal, Spain, even Britain. Adding to these concerns are widespread forecasts that the Euro will continue to slide against the dollar, compounding losses for U.S. investors with Euro holdings.
So is it any surprise that investors are happy to sit out Europe’s financial crisis in U.S. stocks, which are being helped along by improving economic numbers and a compliant Fed. No matter that the improvements are small and feeble, they’re still improvements. How long the optimism lasts is an open question, but for now it is quite tangible.