French voters will head to the polls Sunday for Round 1 of their presidential election. If you don’t care who wins, think again, because the results could affect your 401(k).
Elections that upend the political status quo and inject uncertainty into global markets can cause large swings in prices of stocks, bonds and other investments.
That’s just what this election threatens to do.
Look at last June’s Brexit vote, which pollsters and investors misjudged. British voters’ decision to leave the European Union sent the Dow Jones industrial average spiraling down almost 900 points, or nearly 5%, in two days. Similarly, Donald Trump’s upset win over Hillary Clinton on Election Day in November knocked the Dow down 800 points in futures trading that night. Both victories were fueled by a populist revolt against perceived inequalities in how wealth and jobs filter through a global economy.
Those sizable stock declines proved short-lived. Professional investors determined that the worst-case economic scenarios were unlikely to play out. The Dow recouped its Brexit losses 10 trading days after the vote. It rose 515 points in the first three days after Trump was elected.
The Dow could be roiled by this Sunday’s French vote, which is too close to call as the four leading candidates are within a few percentage points of each other in polls. How turbulent it gets will depend on which two candidates make it to next month’s final round, investment pros said. The top two vote-getters will vie for the French presidency in a final vote May 7.
THE ‘NIGHTMARE’ SCENARIO
The biggest market fear — which Citigroup dubbed the “nightmare scenario” in a recent report for its clients — is that the two candidates who are perceived as threats to growth and financial stability, Marine Le Pen and Jean-Luc Melenchon, will make it out of the first round of voting. That would pit them against each other in the final round, and one of them would become France’s next president. .
“It has the potential to cause shock waves in the market,” Daniel Christen, an economist at U.K.-based Capital Economics, warned in a client note.
These two candidates are labeled “euro-skeptics” by professional investors and have populist leanings to the far right and far left. The far-right candidate, Marine Le Pen, wants to pull France out of the EU. A critic of globalization, she wants to limit immigration into the country. The far-left hopeful, Jean-Luc Melenchon, wants to renegotiate France’s treaties with the EU. He favors policies that investors claim could slow growth and push the country’s debt higher, such as increasing public spending, boosting the minimum wage and lowering the retirement age for workers.
If they both advance, a low probability but possible, that could harm both the French and European economies, triggering a drop in the U.S. stock market, said Geoffrey Pazzanese, a senior portfolio manager in Federated Investors international equities group.
Investors would probably react by getting rid of riskier investments in their portfolios, which would drive stock prices lower — at least in the short term, he said.
Companies in the Standard & Poor’s 500 stock index that benefit from a strong global economy would see an “immediate sell-off” Monday, Pazzanese said, pointing out that sellers of consumer goods and industrial equipment in the eurozone could be the most vulnerable. Commodities such as oil would also fall.
Investors in search of safety would probably flock to havens such as U.S. government bonds and the dollar. U.S. investors who own shares of American multinationals should prepare for turbulence as the euro is likely to fall if the final-round election winner is Le Pen or Melenchon, said Luca Paolini, chief strategist at U.K.-based Pictet Asset Management. A weaker euro would make U.S.-made products sold in Europe more expensive. It would be more difficult for European shoppers and businesses to afford them, dragging down earnings of U.S. multinationals.
Thursday’s terror attack in Paris adds to the election’s uncertainty. After the attack, Le Pen called for an immediate lockdown of France’s borders and for law enforcement to detain or deport people on the country’s terror watch lists.
THE COMFORTABLE SCENARIO
Paolini said investors would be more comfortable if a candidate who favors staying in the single-market European Union advances.
Emmanuel Macron, an ex-banker and France’s former minister of the economy, is the front-runner and one of the two preferred candidates in the eyes of investors, given his business-friendly and pro-EU stance. The other candidate, Francois Fillon, has free-market views that have been well-received.
It is likely that either Macron or Fillon has enough votes to win the final vote next month against an anti-Europe candidate.
The one caveat is that if Le Pen or Melenchon captures upward of 30% of the votes in Round 1, it would suggest the candidate has a real chance of becoming president in the final round, Paolini explained.
THE BULLISH SCENARIO
The most bullish outcome in the first round of voting for investors is if both Macron and Fillon moved on to the final one.
Not only would that rule out an extreme candidate winning, which would raise investor uncertainty, it would send a message that the populist wave is losing its momentum, Paolini said.
Stocks and other investments deemed risky, such as commodities, would probably rally. Bond markets, especially those in Europe, would avoid falling. That’s a financial positive because borrowing costs wouldn’t spike higher and weigh on growth.