On the day the Catalan parliament voted in favor of “Catexit”
from Spain, the IBEX-35 stock-market index dropped 1.4 percent while the Stoxx
Europe 600 gained 0.3 percent.[1]
The IBEX-35 is an stock-index of companies based in Spain. Investors also sold
state bonds; yields on 10-year bonds rose to 1.574% from 1.558. Even though
these changes were hardly earth-shattering in magnitude, their directionality
points to investor-anxiety. I submit that it was overblown, which suggests that
investors generally tend to over-react to political events.
Analysts said at the time that the state of Spain and the
E.U. were unlikely to recognize the validity of the legislative vote, so the possibility
of social unrest accounted for the drop in the index and rise in bond-yields.
The prospect of a Catexit was indeed still bleak; in fact, the state government
had redoubled its control in the problematic, wealthy region, so even the
prospect that social unrest would even ruffle the feathers of business could be
said to be bleak. Uncertainty itself was the alleged culprit. The Wall Street
Journal observed at the time that the “market selloff reflects fears that uncertainty
will be harmful for [the state’s] economy.”[2]
The fear of fear itself, I submit, can as in this instance be overblown, given
the haziness of the future negative scenarios.
Generally speaking, political risk can be overstated if a political
event occurs on a day rather than strung out over weeks or months even though
the eventual possible outcomes are far from clear. The publicity from the sheer
dramatic flair of an event can magnify the perception of uncertainty, prompting
investors not just to stay away, but even to sell.
[1]
Jon Sindreu, “Stocks, Bonds Hit by Political Unrest,” The Wall Street Journal, October 28-29, 2017.
[2]
Ibid.
