Welcome Back: Dow Drops 331 Points as Oil Slides, Grexit Fears Revived

So this is why we all came back from vacation: to sell.

justin lane/European Pressphoto Agency

The S&P 500 fell 1.8% to 2,020.58, its biggest drop since October, while the Dow Jones Industrial Average dropped 331.34 points, or 1.9%, to 17,501.65. The Nasdaq Composite declined 1.6% to 4,652.57 and the small-company Russell 2000 finished the day off 1.3% at 1,183.63.

Why has 2015 gotten off to such a painful start? Chalk it up to oil–prices continue to fall–and the return of the Grexit, which sounds more like a children’s book than something that could bring down global financial markets. Citi Private Bank’s Steven Wieting, however, doesn’t Greece woes will inflict the kind of damage it did in 2011. He explains why:

Greek politics has once again managed to rile world markets to a noticeable degree. However, unlike the backdrop of 2011-2012 in particular, there are actually far fewer uncertainties regarding Greece's impact. In mid-2011, the European Central Bank (ECB) raised interest rates, and for a time, the notion of mutualizing (socializing) any portion of EU member financial and banking obligations was in serious doubt. Subsequent debt restructurings in several countries (including Greece), an EU-wide banking union, and a far more activist approach to monetary policy – one that considers the deflationary consequences of financial catastrophe – have taken hold.

One should not expect ECB help for Greece under an extreme scenario in which a political decision leads it to completely abandon all agreements with Eurozone lenders. Yet even in the event of an eventual Greek Eurozone exit (somewhat easier now for Greece as it runs a small primary budget and external surplus) the idea that other Eurozone member states would now want to follow a potential Greek lead into isolation seems incredibly dubious. Indeed, while some negative impact is being felt, market pressures on other Euro periphery states – with sovereign rate rises of 10 basis points or less today – are a mere slim shade of the impact felt at times in 2011-2013

Wells Capital Management’s James Paulsen thinks the global economy will rebound–but doesn’t think that necessarily spells big gains for the S&P 500. He explains why:

Expect a good year on Main Street but a more challenging environment for Wall Street. U.S. real gross domestic product (GDP) may rise by its strongest annual growth rate of the recovery close to 3.5% to 4%. Current widespread anxieties about the potential for a deflationary spiral are likely to fade as global growth outside of the U.S. also rebounds this year. On Wall Street, good news on the economy may become bad news for investors as anxieties escalate over "inflation/overheat/is the Fed behind the curve" fears…

The stock market is likely to experience a volatile but essentially flattish year caught between the opposing forces of improved economic growth and increasing evidence the Fed may be behind the curve. Similar to past recoveries when the Fed first began tightening (1984, 1994, and 2004), expect the S&P 500 to oscillate in a broad range between 1850 and 2250. While the stock market may end the year a bit higher around 2150, it may also experience a significant correction of 10% to 15% sometime during the year.

That sounds like a roller coaster ride. I’d much prefer the beach.