The Independent Market Observer

Hope Versus Fundamentals: Scotland and the Stock Markets

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Sep 19, 2014 12:10:26 PM

and tagged Politics and the Economy, In the News

Leave a comment

Hope versus fundamentalsOkay, I admit it. Not only did I get up to check the numbers on the Scotland independence referendum every hour or so last night, but I also spent a few hours earlier in the evening arguing with friends about it. I’ve never been this personally engaged in a foreign political event.

I find it hard to explain why this is, even to myself. I come from a Scots-Irish background, so that may be one reason. Another reason is that I identify with the romantic, hopeful aspirations that drive the independence movement. I get it; I really do. The fight for independence represents, in many ways, what is best about the human spirit: the desire to make a better future for ourselves and our families. You can’t argue against the basic motivation here.

Hope versus fundamentals

The problem with the Scotland independence referendum is that the economic fundamentals just were not there. The risks were real—and substantial—and the benefits mostly ill defined, emotional, and ethereal. Not unreal, just much more contingent than the costs. To vote for independence was to choose hope for the distant future versus fear for the immediate future.

In the end, the Scots voted that they should not be an independent country. I don’t think we have seen the last of this, but both sides have displayed an admirable commitment to moving on. The referendum has been an example of exactly how a disagreement like this should be settled. Both the Yes and the Better Together movements should be proud.

With the removal of the uncertainty that would have been created by a yes vote, markets are reacting positively and investors are moving back into risk assets. Make no mistake, though; investors by and large don’t make decisions on longer-term hope but on shorter-term fundamentals.

Most of the time, that is. British-born American economist Benjamin Graham famously said, “In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine.” When it is a voting machine, though, the market can be as susceptible to hope as any political campaign.

I think this is relevant in evaluating that fundamental of stock market investing—the efficient market hypothesis—which assumes that all investors are fully informed and rational. We just saw an example of a campaign in Scotland where all voters were put in the position of making a substantial economic (among other things, of course) decision. With public interest and enthusiasm pretty much as high as they have ever been, the level of research and thought have come as close as possible to meeting the efficient market criteria of fully informed and rational decision makers. 

And yet, we still had a 45‒55 spilt. Clearly, views of the future can vary widely. Despite almost universal agreement among economists, and others, that Scottish independence would have substantial negative effects, almost half of voters still made a noneconomic decision. 

I think this has real implications for how we understand investing. To say markets are reasonably priced—because the market is never wrong—is to assert that investors make decisions based solely on economic factors. For many, this may be true, but certainly not for all. Anyone investing on the basis that the market is rational and fully discounting risks should consider the results of the Scottish referendum, where almost half voted for hope instead.

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



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.


Please review our Terms of Use

Commonwealth Financial Network®