Can’t Judge a Book by its Cover
By John Stoltzfus,
Chief Investment Strategist
Who Wants Yesterday’s Papers?
A New Pragmatism Emerges the Victor in Post-Brexit Elections in Europe
John Stoltzfus, chief investment strategist, discusses the results of recent European elections and their impact on markets.
What we’ll identify as “pragmatism” defeated populism in a third election on the European continent as Chancellor Angela Merkel’s party emerged victorious in an election held in Germany’s most populous state on Sunday. Her party’s victory signals support for her candidacy when she runs for re-election in September and near term augurs well for when Chancellor Merkel meets with other world leaders including President Donald Trump in the months ahead.
For now at least fears of a “Nexit” by the Netherlands or a “Frexit” by France are “yesterday’s papers.”
From our perspective as market strategists, the post-Brexit message from voters in Europe expressed if not uniformly, at least in parallel, legitimate concerns about economics, business conditions and jobs in a globalized and digitalized world along with concerns about immigration and wealth inequality.
That said, the votes thus far have broadly indicated voters’ support of the European Union, EMU, the business community and trade as structural entities from which resolutions to national and economic problems can be found.
“The challenge in the next few years will be for the recently and newly elected in Europe as well as stateside to effect change suitable to their constituencies’ desires and needs as the clock ticks relentlessly on.”
Markets Rise as Populism Wanes
Market reaction as reflected in the performance of the developed, emerging, as well as in the frontier markets year-to-date and over the course of the past 12 months in our opinion reflect a confidence among investors that while a broad array of problems tied to significant geopolitical, country specific, economic, cyclical, secular and demographic issues abound, the risks associated with these are recognized and in many cases are being addressed to some degree. That recognition and the issues that are being addressed have resulted in a vote for a change disfavoring populism.
The overall effect of this change along with an ongoing stateside economic expansion and global economic recovery has been for markets worldwide to have moved higher, often climbing a wall of worry. We believe the markets have prospects for even further upside should fundamentals continue to improve. An added boost to growth could come from fiscal stimulus stateside as well as Europe should key agenda items of newly and recently elected administrations find bipartisan and even multipartisan support.
So far the markets have responded positively to improved fundamentals, election outcomes and the beginnings of monetary policy changes around the world. Over the course of the past 12 months the S&P 500, the S&P 400, the Russell 2000 and the NASDAQ Composite have respectively risen 18.1%, 20.1%, 25.6% and 29.8%.
Internationally MSCI EAFE (the developed markets ex-US and Canada), MSCI Emerging Markets and MSCI Frontier Markets have respectively advanced 13.5%, 24.3%, and 7.9% in the past year. In the same period the MSCI ACWI Index (developed and emerging markets combined) rose 15.7%.
Pre-election rhetoric as well as victories that signal a preference for pragmatism over populism indicates to us electorate constituencies are frustrated with traditional entrenched political organizations as well as with traditional political and bureaucratic solutions.
The challenge in the next few years will be for the recently and newly elected in Europe as well as stateside to effect change suitable to their constituencies’ desires and needs as the clock ticks relentlessly on.
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