Fresh Future FREXIT Fears

A May 7th French Presidential run-off is a result of this last weekend and the ripple effects are being felt in the stock market. Like the US presidential election where sixteen traditional Republicans lost to a non-traditional candidate, France had a crowded field of eleven vowing to lead the country as its next president. The result was similar, as the centrist Macron won the most votes at 23%, and the Trump-like runner-up Le Pen came away with 22%.

FREXITThe Wall Street Journal summed up the election this way, “On Sunday the EU and its demands of free trade and open borders became the defining fault line of a new political order. Macron, a former investment banker who seeks deeper EU integration vs. Le Pen an opponent of the EU, its Euro common currency and runaway globalization.”

The contrast between the two candidates is important because the result has, and will, affect our portfolios. Lessons learned in the last 12 months have taught us anti-establishment change around the world is here and a force to be reckoned with. Here’s how we believe the outcomes could move the markets and our accounts:

Le Pen wins – This outcome represents the wildest change and the market should sell off dramatically. We believe this will result in FREXIT (France exiting the EU) and would spell the beginning of the end for the Eurozone. The EU is the largest economy in the world with 24% of the world’s GDP vs 22% for the US in 2014. If the EU breaks up, it would be a great blow to the global economy — a little like our states seceding from the Union to become their own countries. This would end in terrible inefficiencies as traveling and doing business across state lines would become much more difficult. The same is true for the EU.

Le Pen, however, is currently a 20-point underdog in the polls, so she’s unlikely to win…just like BREXIT was unlikely to pass and Trump was unlikely to get elected.

Macron wins – Macron is more or less like a Hillary without any elected political experience. The fact that he had the most votes on Sunday indicated to the market that things are likely to continue in France as they have. This was a sigh of relief for the market, which has been up two days in a row now.

Anti-establishment has won – Regardless of who receives the most votes on May 7th, it’s clear that France, like the UK and US, is ready for change. There will be legislative elections in June and the growing dissatisfaction with the existing Socialist and Conservative parties should continue to play out. The result will likely be more volatility as uncertainty increases in the future.

In case you’re feeling anxious about this news, we want you to know this is not a unique event. There’s always news that’s concerning and eventually it will show itself in a down market and down accounts. We stand ready to take advantage of the next downturn regardless of the particular headline. The most important part of our job, and the part we enjoy the most, is helping our clients make good decisions during these tumultuous time periods.

Please call us if you have any questions or if you’d like to discuss this election, or anything else, in more detail.

-Tim Porter, CFP®