Inside Analysis: Understanding The Market Drop
The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is trading at $155.46, -0.42 (-0.27%). The low of the day was $154.20 as the markets have bounced well off their lows. So why did the markets fall today? Additionally, why have they recovered so nicely?
The Trigger: News
As part of a bailout deal reached with the EU, Cyprus committed to taxing deposits in its banks up to 9.9% for accounts over 100,000 and 6% for all accounts under. This means, all those savers who stashed cash (rich or poor) and were not wild spenders will pay dearly.
Why It Is A Big Deal?
Bank Runs: If you knew your money in the bank was going to be taxed at 10%, wouldn't you go remove it immediately and store it under your mattress? I would and so might many in European countries like Cyprus, Greece, Italy, Spain. This is the fear. If Cyprus is setting a precedence, bank runs could begin. Many in Cyrus have already gone to the ATM's and withdrawn as much as they can. Mass bank runs would send Europe into a catastrophic collapse.
Why The U.S. Markets Are Recovering?
Poor banking conditions in Europe and fear of a tax on deposits will only encourage money to be transferred into the United States banking system. More money into the U.S. is not a short term negative, but a positive. Some of this money flow will even find its way into the Dow Jones Industrial Average, S&P 500 and NASDAQ. In addition, any short term hurt to the global outlook is another reason the Federal Reserve will stick around longer, printing money.