Frexit?

French Election

I took French in high school…and made a D.  It was the only D I ever made on a report card.  Still, I was relieved to be done with it.  French was by far my least favorite subject.  Later, while in college, I traveled to Paris as part of a study abroad program.  The only phrases I knew were “Où a la gare” (Where is the train station?), “Où a la poubelle” (Where is the trash can?), and “La singe est froid” (The monkey is cold).  The latter phrase was unique but not very useful.

My extensive knowledge of the French culture is finally paying off, as most investors are keenly focused on the upcoming French presidential election.  This election represents a pivotal moment for the entire Eurozone.  Anti-EU candidate Marine Le Pen faces off against pro-EU candidate Emmanuel Macron in the final runoff on May 7th. The fear is that a Le Pen victory could signal the end of France as a member of the Eurozone, which could ultimately lead to the end of the euro currency.

Le Pen’s campaign has made it clear that she plans to take France off the euro and back to the franc (their currency prior to entering the EU).  In theory, this could lead to a default on French debt and create instability for weaker Eurozone economies, e.g., Spain and Italy. 

“We expect … significant downside in case of a Le Pen win,” stated one Deutsche Bank strategist, who echoes the sentiments of many.

Macron is currently favored in the polls.  If he is elected, European stocks could rise notably in a rally much like the one the US has experienced since Donald Trump's victory. "There's pent-up demand for European assets.  If the French elections don't result in a disruptive outcome, this is the year for European equities," predicts Mislav Matejka, global equity strategist at J.P. Morgan.  Stay tuned.

Seasonality in Stocks

 On the US home front, summer months tend to be a slow time for equity investors.  Since the year 1950, according to Investopedia, the Dow Jones Industrial Average (DJIA) has gained an average of only 0.3% in the months from May through October, but has averaged gains of 7.5% from November through April.

The rationale behind the seasonal gains is unclear; however, increased investment flows during the winter months are occasionally cited as part of the reason.  This year could follow a similar pattern.  From November 1, 2016, through April 27, 2017, the DJIA gained more than 16%, more than double the historic average for that time period.  

The driving forces behind the recent stellar performance (lower tax rates, higher corporate earnings, low interest rates), are legitimate and have given investors reason to remain bullish.  While we see very few clouds of concern on the horizon, "investor fatigue" may set in as traders begin to take gains on their profitable positions.  Nevertheless, we recommend holding the course for now.  Investor optimism is high, data is still relatively strong and momentum is in the right direction.    

Food For Thought

Benjamin Franklin once said, "An investment in knowledge pays the best interest." The truth of that quote is rooted in the fact that knowledge inspires confidence, and confidence can breed success. 

During the upcoming summer months, we plan to host some educational workshops that focus on the "ABCs of Investing."  If you'd like to gain more knowledge in this area, we hope you'll join us for our entertaining and complimentary summertime brunch series.  Click here for more details.