This article is about the latest movements in the French presidential election. The shifts in this election have been happening quickly. The reason I am analyzing it closely because it has the potential to move equity markets, including in the U.S. There has been a wave of populism spreading throughout the world because the global economic recovery has been week for the developed world and many workers haven’t seen real wages increase. While technology has improved and made our lives better, there has been declining faith in the government because of those socioeconomic factors. If the current system is despised by citizens, it can have dangerous consequences because the proverbial baby can get thrown out with the bathwater. While the desire for a more representative government is virtuous, eliminating free trade hurts efficiency as it doesn’t allow countries to specialize in producing what they make best and export it freely.
Because of these unknown consequences, equity markets tend to have a knee-jerk sell-off when a populist candidate/cause wins. We’ve seen two examples of this. The first was Brexit and the second was Trump. I have heard the argument that they didn’t matter because the stock market recovered afterwards. I find that logic to be silly because you can extend that logic to say that no risks matter because stocks have always eventually rallied since the market is at an all-time high. Investors tend to ignore risk when volatility is low and the market is rising steadily. However, any investor with more than 8 years of experience realizes that risk matters. In 2008 it was the exact opposite of today as it felt like stocks were going to zero because they were falling every day.
This time the populist risk in the French election is Marine Le Pen. Le Pen is calling for a referendum to leave the EU. If she wins, the crash in the market would be worse than Brexit because it would end the EU. She has been leading most of the polls, but that isn’t too worrying because of the way the French election works. The first election on April 23rd narrows the race down to two candidates which face each other in the runoff on May 7th. Therefore, even though Le Pen has been leading the first-round polls, she doesn’t have a realistic shot of winning the general election because she loses in head-to-head polls versus the second and third place candidates. I’ve been handicapping the race as new information comes out and shakes it up. I can only tell you what’s happening based on the information I have. In two weeks, the election can shift again and everything I say here can become outdated.
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