logo small

French Frights

Many investors view government debt as a concern for future market returns. The long-run data suggest country debt-to-GDP has not been correlated with stock market returns. This is likely because debt tends to be a slow-moving variable that investors can observe and account for when setting prices. Markets do not react to circumstances; they react to news. If the government debt is not news, it’s unsurprising it’s not a headwind to stock markets.

Sometimes, however, markets are greeted with news about a government’s fiscal outlook. France’s President Macron recently called for a snap, or unscheduled, parliamentary election. This election opens the door to policy changes that would substantially increase government spending deficits. In the span of just a few days, the cost of sovereign debt relative to peers—represented by the yield spread between French and German bond yields—increased by more than half, from 0.49% to over 0.75% by June 18.

Markets continuously and instantaneously process new information. That’s what makes them so difficult to outguess. But investors can take comfort in the forward-looking nature of markets. Once changes in circumstances are reflected in prices, investors should expect positive returns, regardless of the outcome of elections.

CONTINUE READING

Print Email

CONNECT WITH US ON SOCIAL MEDIA!