An Abrupt Start To Election Season

Of all the consequential elections taking place in 2024, who would have thought that the European Union parliamentary contest would be the one to unleash a volatile pulse of Sturm und Drang into regional financial markets? Typically, the EU-level elections have served as an arena for demonstrative flamboyance, perhaps not unlike the over-the-top histrionics of Eurovision musical performances, in which the good citizens of Europe register their dissatisfaction with the status quo without doing anything they figure might have a practical impact on their quotidian lives.

A Lightning Bolt from Jupiter

One might have said that this year’s elections were true to form in this sense, until French president Emmanuel Macron, whom the local press christened “Jupiter” after his meteoric ascent to the pinnacle of the French political system in 2017, threw a lighting bolt worthy of his nickname and called for snap national elections to be held at the end of this month. Macron’s centrist alliance was trounced in last Sunday’s EU elections by the far-right National Rally party, which gained 31.4 percent of the vote compared to just 14.6 percent for the Macron alliance. The French financial markets were not amused, to say the least. In addition to the plunge in the CAC 40 domestic stock index (shown below), the spread between French and German 10-year sovereign bonds widened to its widest level in seven years.

The thinking behind Macron’s decision to call snap elections, as far as anyone can figure, is that when French voters are presented with the choice of entrusting their own government to the far-right party led by long-time provocateur Marine Le Pen, they will do as they have done in past elections and revert back to the center. In other words, Macron’s take on last Sunday’s outcome is just as we described above: voters take out their frustrations in the EU-level contests, but when it comes to choosing the national government that will make policies affecting their own lives, they will choose the safe outcome. Unfortunately for Macron – as well as for investors who were long French exposure going into last weekend – that playbook appears to be in serious jeopardy. Polls and related analysis this week suggest that, not only is the far-right RN party likely to do well on June 30, but a newly-formed alliance of four left-wing parties may wind up coming in second in many of the regional races. That could mean that when the second-round runoff between the top two candidates takes place, a week after the first round on June 30, in many cases, neither candidate will be representing Macron’s centrist bloc.

Markets Hate Surprises

Is there a larger lesson to be learned from the troubles in France? Should investors be thinking through defensive strategies as the election season here at home heats up? If you are a regular reader of our weekly commentary, you can probably guess that our answer to the second question is no: it is not a good idea to try to translate whatever scenario you have in mind about November 5 into a tactical investment program. Markets tend to abide by politics, even when the politics are messy. What markets really, really do not like, however, is being surprised. The fallout in French markets this week, which has bled into other European markets, arguably has more to do with the surprise factor than with anything else. Macron’s political weakness is nothing new; his party has been faring poorly for some time now. But his own term as president does not end until 2027. Calling snap elections now only means that his last three years in office could be even more hamstrung by opposition than they already are.

By contrast, the contours of the November elections here in the US are already well-known. Barring something very unexpected (which can never be completely ruled out, of course), we know who the candidates are, we know more or less what their political platforms are, and between now and November we will have thousands upon thousands of pages and speeches and slide decks and polls and whatever else to saturate our cognitive mechanisms. There will be practical consequences depending on the outcome, and at some point in the future, those consequences will have an economic impact. But trying to anticipate all these unknown variables ahead of time is a fool’s errand, and we would caution against trying. One may have a cause-effect scenario in mind that is viable and rational. The market, however, is seldom rational in the short term, and it can stay irrational longer than one’s position can stay solvent.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.