10 Ways the European Debt Crisis Affects Your Investments

A look at several trends that investors should keep an eye on.

By and + More

In a turn of events capable of giving even the most seasoned traders a bad case of whiplash, global markets snapped back to life on Monday following news that the European Union and the International Monetary Fund will set up a $1 trillion bailout fund.

[See What Washington Needs to Learn From Greece.]

The creation of the fund, which will be used to contain the debt crisis that's raging throughout the euro zone, calmed the fears of the very same traders who just last week led a mass exodus from stock markets throughout the world. It also sent stocks soaring in Europe, Asia, and everywhere in between. In the United States, the Dow Jones Industrial Average gained nearly 4 percent on Monday.

[Use U.S. News' Mutual Fund Score to find the best investments for you.]

Reports of the exact value, in U.S. dollars, of the package have differed, but according to the New York Times, the European Union will provide $633 billion in loans, while the IMF will pitch in as much as $321 billion, also in the form of loans. Apart from this rescue fund, the European Central Bank announced that it will purchase sovereign debt issued by members of the euro zone.

"What we can say for certain is that absolutely nobody out there thought that the European policymakers would be able to come out with something this large, this comprehensive, with this much breadth and depth to it," says Erik Weisman, a portfolio manager for MFS Investment Management. "In that sense, I think it is very, very positive, very bullish, and you're supposed to have a much higher degree of optimism than you had on Friday."

Perhaps the package's most attractive feature is that it aims to reduce the extent to which Greece's troubles will spill over into other vulnerable countries, such as Portugal, Ireland, and Spain. "Greece can now underperform and you have a backstop for some of the other players," says Weisman.

Despite the initial confidence boost, a number of questions remain unanswered. Chief among them is what European Union countries will do to keep the problem from spiraling out of control after this temporary stopgap expires.

"This is a rescue operation, and a rescue operation is never going to solve the problem; it just contains the problem and helps Europe get to the next stage," says Bart van Ark, the chief economist at The Conference Board. "If this rescue package is going to work, it will contain the problem in order [for governments] to find a more structural solution."

As this situation gets sorted out across the Atlantic, U.S. investors will likely find the global markets increasingly difficult to navigate in the months ahead. In fact, for most investors, even the past several days have been nothing short of mindboggling.

Last week alone, the S&P 500 lost 6.4 percent of its value, reviving concerns that the market's breakneck rally was destined to run out of steam. And for investors who remained lukewarm about stocks even as they shot up throughout 2009, the recent falloff was a stark reminder that economy's wounds have yet to fully heal.

With that in mind, U.S. News has compiled a list of 10 investing themes that have been brought to the surface by Europe's woes. Here you'll find explanations as to what has already happened and tips for what's on the horizon:

We're all in this together. A year ago, most investors would have scoffed at the idea that a country like Greece could upend the global economy. But the past few weeks have proven that, particularly in times of crisis, the world's stock and bond markets can all be intimately tied together. That's especially true when a major currency is threatened. Just as the collapse of Lehman Brothers showed that Wall Street can rise and fall in harmony, the European debt crisis has demonstrated that global economies are often highly correlated. "All of a sudden, it's very much the same kind of interconnected web that we saw after Lehman," says Weisman. "It's not exactly the same because there's much less leverage in the system now than there was back then. But the way it spreads around the globe is very similar."