The Independent Market Observer

2/26/13 – Italian Comedians Win Election, Results Not Funny for Markets

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Feb 26, 2013 9:06:14 AM

and tagged Politics and the Economy

Leave a comment

I was sitting on a plane home last night, watching SpongeBob with Jackson, and as I flipped through the channels, I saw that the stock market had cratered since we got on the plane. What?

A couple of days ago, I wrote that market risks were moving back into the forefront of investors’ thoughts, and that one of those risks was the pending Italian election. The results were actually worse than anyone had imagined, and, as a result, markets around the world sold off.

Three groups are essentially tied for votes in the Italian parliament: the center left, which Mario Monti, the former technocrat prime minister, is associated with; the center right, led by Silvio Berlusconi, the media tycoon and former prime minister also known for multiple indictments and “bunga bunga”; and the Five Star Movement led by Beppe Grillo, a comedian.

Italian politics has long been a train wreck—this is, after all, the country that gave us Niccolo Machiavelli and The Prince—so why should we care?

The reason this is important is that a majority of Italians have rejected, in no uncertain terms, the economic austerity program that stabilized the euro and the European financial markets. Monti took Italy from a financial basket case to stability, and thereby helped stabilize the eurozone as a whole—and he has just been rejected. Berlusconi has spoken out against the stability program, and the Five Star Movement has called for a referendum on whether to leave the euro completely.

Italy is the third-largest economy in the eurozone, and the fourth in Europe. A rejection by Italy of the austerity program led by Germany could prompt other countries, such as Spain—the next largest economy—to do the same. At that point, Germany would have to decide whether to allow the Italians and the Spanish to keep spending German money or to allow the eurozone to break up.

The situation is not so dire at the moment. Italy has entered a political Twilight Zone, which will last until the three parties determine whether some coalition can agree on a program to govern. If not, it will be back to the polls.

The big mystery here is exactly what the Five Star Movement representatives will want. Will they vote against everything? Will they ally themselves with one of the parties? Will they try to force another round of voting? We don’t know.

And that, in the end, is the problem. We thought we knew roughly how Europe would play out, and the Italian vote showed that we were wrong. Uncertainty has moved back to the front of the European project in a big way.

Markets hate uncertainty, and yesterday’s results reflect that. Today, we see a bounce back, as it becomes clear that we don’t have a problem yet, just the potential for one. Bear in mind, though, that even as markets go back up, the potential problem hasn’t gone away—and if that problem actually materializes, it will be a very big one.


Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®