This article is about the latest movements in the French presidential election. The shifts in this election have been happening quickly. The reason I am analyzing it closely because it has the potential to move equity markets, including in the U.S. There has been a wave of populism spreading throughout the world because the global economic recovery has been week for the developed world and many workers haven’t seen real wages increase. While technology has improved and made our lives better, there has been declining faith in the government because of those socioeconomic factors. If the current system is despised by citizens, it can have dangerous consequences because the proverbial baby can get thrown out with the bathwater. While the desire for a more representative government is virtuous, eliminating free trade hurts efficiency as it doesn’t allow countries to specialize in producing what they make best and export it freely.

Because of these unknown consequences, equity markets tend to have a knee-jerk sell-off when a populist candidate/cause wins. We’ve seen two examples of this. The first was Brexit and the second was Trump. I have heard the argument that they didn’t matter because the stock market recovered afterwards. I find that logic to be silly because you can extend that logic to say that no risks matter because stocks have always eventually rallied since the market is at an all-time high. Investors tend to ignore risk when volatility is low and the market is rising steadily. However, any investor with more than 8 years of experience realizes that risk matters. In 2008 it was the exact opposite of today as it felt like stocks were going to zero because they were falling every day.

This time the populist risk in the French election is Marine Le Pen. Le Pen is calling for a referendum to leave the EU. If she wins, the crash in the market would be worse than Brexit because it would end the EU. She has been leading most of the polls, but that isn’t too worrying because of the way the French election works. The first election on April 23rd narrows the race down to two candidates which face each other in the runoff on May 7th. Therefore, even though Le Pen has been leading the first-round polls, she doesn’t have a realistic shot of winning the general election because she loses in head-to-head polls versus the second and third place candidates. I’ve been handicapping the race as new information comes out and shakes it up. I can only tell you what’s happening based on the information I have. In two weeks, the election can shift again and everything I say here can become outdated.

At the beginning of my coverage, I said Le Pen had very little chance of winning. Then a few weeks later, I said she had an outside shot at winning. Because of the latest shifts in the race, it looks like she’s back to not having a realistic shot at winning. The big shift in the race since my last article is the scandal reverberating in Fillon’s campaign which is hurting his poll numbers. The scandal that he paid his wife hundreds of thousands of euros in public funds to be his parliamentary assistant even though she did little work is not a new one, but the latest ensuing fallout is eating away at his support. Fillon’s campaign chief, Patrick Stefani and his chief spokesman, Thierry Solere, stepped down on Friday. The center right party, Union of Democrats, and Independents, pulled its support. As I mentioned in the last article, the centrist Bayrou decided to not run and instead endorse Macron.

This scandal which has led to Fillon’s campaign collapsing from within has resulted in the poll below. Fillon has fallen into third place in the election. Fillon is so disliked that if he was replaced by the candidate he beat in the primary, Alain Juppe, Juppe would move into first place in the race. Juppe was convicted of misusing public funds in 2004. I think the polls are overestimating the support he’d get because when he jumps into the race, the media will focus on his flaws. The media can make a popular person into an unpopular one quickly, especially in politics. This hypothetical scenario doesn’t mean much anyway because Juppe said he’d won’t run and Fillon said he’ll stay in the race.

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The poll above was shared by the media extensively because it was the first in a long time to show Le Pen in second place. It’s a bad idea to focus on one poll because any poll can be an outlier. The only thing outlier polls are good for is giving political commentators something new to talk about. The chart below shows the 14-day weighted moving average of the latest polls in the race. Le Pen is still in the lead. On Friday, a new poll was released which said Le Pen had 27%, Macron had 24.5%, and Fillon had 20%.

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As I have mentioned in all my articles covering the French election, Le Pen does better against Fillon in the head-to-head polls. In the latest poll versus Macron she loses by 22 points and in the latest poll versus Fillon she loses 14 points. This means the risk facing equities is diminishing. The bond yields reflect the diminishing risk as the difference between the German 10-year bund and the French 10-year bond is the lowest in a month. The higher the French bond is over the German one, the higher the political risk premium. In my article last week, the difference was 74.5 basis points. Now the difference is only 58.5 basis points.

Conclusion

Some bullish investors in U.S. equities don’t believe risk matters anymore as they haven’t witnessed a market which has fallen or don’t remember when it used to fall. I am still studying which events pose risks to the market. If Le Pen won the election, the stock market would crash worse than the Brexit. However, that looks highly unlikely at this point, so the bulls can keep the party going for the next two months unless something else comes up.