Today is a big day on the current events front, so much so that I’ve seen it referred to as “Super Thursday.” We have the British election; the meeting of the European Central Bank (ECB), which will determine the course of monetary policy; and, closer to home, the testimony of former FBI Director James Comey. I've spent a lot of time recently discussing these events, both individually and collectively, and what they could mean for the U.S. economy and markets. On reflection, they provide a good example of how investors spend quite a bit of time focusing on things that do not really matter—and ignore things that do. But more on that later.
The British election
Let’s start with the possible outcomes of the British election. If the Tories win, the world has to deal with the Brexit negotiations. In the case of a tie, there will be another election or a minority Labor government (and the world still has to deal with the Brexit negotiations). Or, just possibly, there could be a clear Labor victory, in which case the world has to—wait for it—deal with the Brexit negotiations.
Make no mistake, the consequences of the election for the U.K. will be substantial. But for U.S. investors, the only change (regardless of outcome) will be how it affects negotiations. These negotiations have not really started, are incredibly undefined, and will go on for years. In other words, there’s really no change at all. Should we as global citizens be paying attention? Yes, indeed. As investors? Not so much.
Next up is the meeting of the ECB. Here, there is a more direct connection to the economy and the markets—and the concern is plausible. In fact, we did see a reaction, but it wasn’t to what the ECB actually did (i.e., hold rates steady). Instead, the reaction appears to come from a revised view on inflation there, which will be lower than expected.
If you think about this, the reaction to the meeting was, essentially, zero. With the European economy recovering, the ECB finds itself in roughly the same place as the Fed: trying to remove itself from the economy and markets, but several years behind. It has a real imperative to telegraph moves ahead of time, so as not to surprise markets—and it did not do so. The last thing either the ECB or the Fed wants to do is rattle markets by surprising them. But once again, no news, no real concern.
As for the Comey testimony, I can make the same points. Whatever Mr. Comey said will not affect employment, consumer spending, corporate profits, or any of the other economic and market metrics that matter. It might rattle the market for a couple of days. But, as investors, we should be ignoring that volatility any way. As a citizen, I certainly care. As an investor? Again, not so much.
So, what does matter?
A good example of what matters, which many people may not have heard of, is the acquisition of one Spanish bank by another, for the grand sum of 1 euro. The target, Banco Popular, was essentially bankrupt. This caused a great deal of justified concern as the European banking system has not yet tested a set of rules designed to limit systemic risk. These rules were established after the financial crisis, when the failure of even a small bank could have rocked the financial system as a whole.
Instead, with the failure of Banco Popular, the fifth-biggest bank in Spain, the rules worked. On one hand, bondholders took a hit and stockholders were wiped out, which was bad for them. On the other hand, depositors were protected, and the assets were transferred easily and with no systemic disruption. In other words, the system worked very well, which is reassuring since many European banks remain at risk. Nice to know the system works.
The bank failure and acquisition, as opposed to the three events noted above, is a great example of news that matters but doesn’t get a lot of coverage. As we move forward, keep in mind that what shows up on the front pages may not actually be what matters to you as an investor.