Worst Thanksgiving week for stocks since 1932

Wall Street has just recorded its worst performance in the Thanksgiving week since the Great Depression of 1932 with the S&P 500 down 4.7 per cent and no rally in shortened trading on Friday. Those analysts predicting a year-end rally are already starting to look foolish.

The long-shadow of the eurozone crisis continues to be cast over the markets. Belgium was downgraded by S&P, Italian bond yields hit eight per cent and Greece was reported to be demanding higher losses from private sector bond holders.

Train wreck

This is a slow-motion train wreck that refuses to get back on the rails. Eventually like all crises this one will come to a head but when? Until then stock markets will continue to lose ground as investors retreat to safe havens.

There has already been a partial run on the banks in the eurozone as Warren Buffett commented earlier last week. That is why eurozone bank holdings at the Fed have doubled this year. Depositors are also increasingly pulling their cash out of Europe just in case the banks fail.

That sounds alarmist but it is only a wise precaution in the circumstances. Besides the euro is now in a downward spiral against the US dollar and the greenback looks the least bad choice. That ought to help support the value of dollar-denominated assets.

Eurozone contagion

And indeed it has with Wall Street showing much lower losses this year than the eurozone bourses. However, the contagion of a recession in Europe is so obvious that even the dimmest analyst on Wall Street can understand that there will be less business for US multinationals from Europe and lower profits when transferred back into dollars from depreciating euros.

Besides the risk of another US banking crisis imported from Europe is also very real, whatever some more ridiculous stress tests conclude. US banks for example are the most exposed to Italy after France (click here). And nobody has even begun to consider the possible contagion of higher interest rates on the US economy.

Thanksgiving week is a reminder of the pioneers who started the great American dream and the problems that they overcame to build a nation. It can be be done again but not without a period of considerable pain before that gain.