Cyprus effect on stocks likely short-term

Wall Street's stock rally is facing pressure from another flareup of Europe's debt crisis.

Cyprus' announcement over the weekend that eurozone finance leaders were pressing for a one-time tax on depositors' savings in exchange for a financial bailout shocked global investors.

The proposal to have Cyprus savers share the financial burden of a bailout adds new elements of uncertainty and unpredictability to Europe's debt crisis. Worried depositors rushed to withdraw cash in Cyprus, where banks will remain closed until Thursday.

Investors fear the unprecedented deposit tax, if approved by Cyprus' parliament, could set a precedent for other troubled economies, such as Italy and Spain.

That fear caused investors to be more risk-averse in the short term. Stocks fell sharply Monday in Asia and Europe and traded lower in the U.S., but were well off their early lows.

With major U.S. stock indexes trading at or near all-time highs, some Wall Street pros say Europe's latest turbulence could spark a long-awaited pull back in the U.S. stock market.

"In an environment where people are looking for an excuse to sell, I would say this news is as good (an excuse) as any," says Paul Hickey, co-founder of Bespoke Investment Group. "As you can imagine, a worry among investors is that if they can do it in Cyprus, why not anywhere else? The ... issue is how does it impact trust and confidence in the financial system. That will be the key to watch, and only time will tell."

At this point, adds Hickey, we could see this situation turning into a "modest correction."

Edward Yardeni, chief investment officer at Yardeni Research, says the latest flare-up in Europe is a reminder that the Eurozone crisis has not been solved. "It demonstrates that Europe (and its debs crisis) will probably be with us for a very long time," he says.

But Yardeni says while the U.S. market is likely to suffer some type of sell-off, it doesn't preclude the U.S. market continuing to rise. The reason: He doesn't believe Cyprus will turn out to cause investors to panic and the financial crisis to intensify.

The biggest hit from this latest situation will be to investor confidence, Yardeni said.

On the plus side, Yardeni says U.S. stocks could benefit from the renewed concerns in Europe; the U.S., where the economy is improving, would be viewed as a better place for investors to park their money.

Likewise, the Cyprus bailout is not likely to have a huge negative impact on U.S. economic growth, which has been ticking up as the recovery and confidence (in the recovery) gain traction, says Joseph Quinlan, a market strategist at U.S. Trust.

"The impact on the U.S. should be marginal, or nothing the markets have not already discounted," says Quinlan. "A key offset to weakness in Europe is the re-accelerating growth in the U.S. and emerging markets."

The U.S. economy has proved it can keep growing despite economic stagnation in Europe. And U.S. companies continue to grow their profits despite continued pressure on their profits in Europe, Quinlan says.

Source:  Adam Shell, USA Today

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