Scott Sumner  

Trump and Le Pen

Earth 2.0?... Score One for United Airlines...

The stock market behaved rather strangely in the period before and after the November elections. Before the election, stocks reacted negatively to each Trump surge in the polls, and stock futures fell late in the evening of November 8th, immediately after it became clear that Trump would win. Stock investors normally "root" for the GOP candidate. Indeed a GOP win in the presidential elections usually boosts stock prices by about 2% (although stocks actually have not done very well during GOP administrations.) To make matters even more confusing, stocks rallied strongly in the days and weeks after the election.

One possibility is that prior to the election investors were worried about Trump's call for protectionism and expelling illegal aliens. After the election, they were reassured that Trump would behave more pragmatically, and heartened by expectations that Trump would sign GOP tax cuts and also engage in deregulation.

A similar pattern occurred in the UK after the recent Brexit vote, where stocks initially fell and then rallied strongly.

One can discern two types of Trumpism. One type is very populist and nationalistic. Trump adviser Steve Bannon has been pushing for nationalistic economic policies and FDR-style spending programs to boost the economy. In contrast, Jared Kushner and Gary Cohn have a more internationalist perspective, and are more aligned with both Wall Street and the free market wing of the GOP.

Last night, Emmanuel Macron came in first in the French presidential election, and is now widely expected to win in the second round against Marine Le Pen. Think of Le Pen as being like the Steve Bannon side of the Trump administration. Le Pen is like Trumpism without the attachment of the GOP (or the UK Tories.) Like Trump, Le Pen is a nationalist on economics and immigration. Unlike Trump, she's also very left wing on broader economic issues.

The French stock market is up over 4% as I write this post, reflecting relief that Le Pen is not likely to win. While the election outcome was in line with the polls, the recent surge of a far left socialist had led to some concern that Macron would not even make it to the second round. Indeed four candidates ended up bunched together in the 19% to 24% range, with Macron being viewed as the most electable alternative to Le Pen. If Macron had not made it to the second round, the French stock market might well have plunged sharply, especially if the only two choices had been on the extreme right and the extreme left. (Le Pen is viewed as being on the right, despite her vaguely socialist views on government spending.)

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To summarize, the recent market response to the French elections helps us to better understand the previous market reactions to Trump (and perhaps to Brexit.) Investors are less concerned by moderate nationalism if it is embedded within a "conservative" administration that it sees as relatively business friendly. But there is one additional factor in the French election that differs from the earlier US and UK votes. France is part of the eurozone, and a win for Le Pen might have cast doubt on the future of the single currency project. This may explain why markets rallied strongly all across the eurozone. Indeed, stocks in Italy rose even more sharply than in France, as Italy has been widely viewed as a potential domino if the euro should start to unravel.

COMMENTS (7 to date)
Lorenzo from Oz writes:

And thank you for not using that currently wildly over-used boo-word fascist.

It is not as if there are not plenty of fine grounds to criticise the current President, or Marine Le Pen or whoever; but no, folk have to go with the ridiculous pointing and shrieking. Which says a lot more about them and a lot less about their targets. (It does, however, increase the chance of setting off dangerous downward spirals via feedback effects.)

I like the characterisation of Le Pen as unencumbered.

One is also struck how humiliating a result this was for the mainstream French political parties. The centre-right candidate came third, the centre-left candidate a humiliating, single-figures, fourth with just over a quarter (26%) of the vote between them.

The French electorate seems very divided in what should be done, but strongly of the view that something seriously different should be.

Lorenzo from Oz writes:

I have a comment in moderation, but, in the meantime, happy Anzac Day! (Since it's April 25th where I am.)

Michael writes:

In the UK case, it was mainly a currency effect. Rise in FTSE mirrored fall in sterling, because the market has a lot of stocks that earn USD (mining, oil etc). Sectoral effect was clear too, with raw materials rising and UK-focused consumer/financial stocks falling.

Doesn't invalidate your general points, and I expected a greater stock market fall despite currency effects.

Scott Sumner writes:

Lorenzo, Actually the center left candidate left was fifth.

I find it interesting that some Trump supporters also seem to prefer Le Pen. In the November election they sometimes justified their Trump vote by pointing to the fact that Hillary favored big government. OK, but Le Pen favors bigger government than Macron. So why do they like LePen?

Michael. I agree.

Jim Glass writes:

Interesting political currents appear to be running around the world.

Here in the USA, the leading, driving figures in each political party aren't members of their parties (Donald poured out money to liberal Democrats until he decided to run as a Republican, Bernie wasn't a Democrat until he ran and today isn't one once again).

In France, the candidates of the traditional major parties finished third and fifth (which means the final winner will have about zero supporting party members in the French Parliament) while President Hollande has a 4% (four) approval rating. After the prior guys didn't fare much better.

Then there's Brexit ... seems like maybe something more than just traditional "local politics" is at play.

LD Bottorff writes:

I would think that one should be skeptical of attributing stock market rallies to election outcomes.

After the election, they were reassured that Trump would behave more pragmatically, and heartened by expectations that Trump would sign GOP tax cuts and also engage in deregulation.

Really? The US stock market rocketed up the day after the election. What reassured investors that Trump would be more pragmatic?

Lorenzo from Oz writes:

I stand corrected.

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