Lethal Weapon 3

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Summary

First it was ‘Brexit’. Then it was Trump. And now it is Fillon.

Former Prime Minister Francois Fillon came out on top with 44.2% of the vote in the Republican primary.

Proceed with caution.

First it was 'Brexit'. Then it was Trump. And now it is Fillon.

On Sunday, voters in France took to the polls for the first-time Republican presidential primary. And in a stunning and unexpected outcome, former Prime Minister Francois Fillon came out on top with 44.2% of the vote. This easily outpaced former Prime Minister Alain Juppe, who finished a distant second at 28.6%, and former President Nicolas Sarkozy, who ended up third with just 20.6% of the vote.

Why is the result of a French Republican primary notable? Because we have once again seen the voters completely defy the expectations provided by the polling data leading up to the vote. Dating back to June 2015, forty-three separate polls were conducted by the likes of Ifop, Ipsos, Opinion Way, Odoxa and Harris Interactive among others. In all but five of these 43 polls over the past 18 months, Mr. Juppe was leading often by a comfortable margin.

For example, in the Odoxa poll from just one month ago on October 20, Mr. Juppe was projected to receive 43% of the vote versus 26% for Mr. Sarkozy, 13% for French politician Bruno Le Maire and just 11% for Mr. Fillon. Again, these were readings from a poll just one month ago that had Mr. Fillon in fourth place trailing Mr. Juppe by 32 percentage points. But just one month later, not only did Mr. Fillon prevail over his rivals, but he ended up besting Mr. Juppe by 16 percentage points. This is a remarkable swing over such a short period of time.

Of course, it should be noted that Mr. Fillon was surging in the polls in the final two weeks, as he quickly jumped into the high teens and then the low twenties in the polls before scoring his first official lead in the final poll conducted by Ipsos just two days before the election with Mr. Fillon at 30%, Mr. Juppe at 29% and Mr. Sarkozy at 29%. But even this final poll did not even come close to predicting the final margin for Mr. Fillon.

So what's next for French voters? Since no candidate in the Republican primary secured more than 50% of the vote, Messrs. Fillon and Juppe will face off in a second round runoff scheduled for this upcoming Sunday, November 27. Previous polls conducted before the first round of voting showed Mr. Juppe winning easily over Mr. Fillon in a runoff at 66% to 34%, but a great deal has changed since this last poll was conducted. According to an Opinion Way poll conducted after the first round, Mr. Fillon is now solidly ahead of Mr. Juppe at 56% to 44%. But as we saw with the first round, much can change over the course of a few days.

So why does any of this matter, particularly to a U.S. based investor (NYSEARCA:SPY)? After all, Mr. Fillon appears fairly reasonable from a political perspective as a self-described Thatcherite. The answer lies not with Mr. Fillon but his likely opponent in the second round of voting for the French presidency.

Marine Le Pen from the nationalist and eurosceptic National Front party has been running consistently in either first or second place in the polls effectively neck-and-neck with Mr. Juppe. But now that Mr. Juppe is suddenly not likely to be the Republican nominee, it is less certain how Mr. Fillon will fare against Ms. Le Pen in a run off. In short, the surprise Fillon victory only serves to marginally increase the probability for a Le Pen victory and with it a Trump style shift toward nationalism in France (NYSEARCA:EWQ). And in the case of France, the ultimate fate of the European monetary union (NYSEARCA:FXE) may be at stake.

Such prospects would presumably have a unsettling effect on U.S. markets including the S&P 500 Index (of course, if 'Brexit' and the surprise Trump victory are any indication, maybe U.S. stocks would use the potential demise of the Eurozone as a completely upside down reason to rally to new highs).

In fact, the last time Mr. Fillon was even included in a first round poll for president was back in early September, and Ms. Le Pen came out resoundingly ahead at 33% versus 18% for Mr. Fillon. Of course, it is the outcome of the second round of voting that particularly matters, and in the last poll that was taken back in May pitting Mr. Fillon and Ms. Le Pen against each other in a run off had Mr. Fillon winning by a once Juppe like 65% to 35%. But once again, this was a poll taken six months ago. And as we saw with the Republican presidential primary, everything can completely change in a matter of days, let alone over six months of time.

But what we have seen in France is just the latest example of polls that have once again completely missed the mark. As a result, establishment leaders and the voters who support them should beware of becoming complacent if run off polls show Mr. Fillon or other prospective mainstream candidates running well ahead of Ms. Le Pen.

For we are living in unpredictable times with voters now eager to make a new change. And as we saw with 'Brexit' in the U.K. (NYSEARCA:EWU), with Mr. Trump in the United States, polling data may not be a fair indication of what is most likely to happen in the end. Thus, we should not be surprised to see Ms. Le Pen either surging in the polls or pulling off a surprise second round victory before it's all said and done.

So what's next across the Eurozone? The French will complete the second round of their Republican primary on Sunday, November 27. The Socialists then take to the stage with their own primary on January 22 with a run off scheduled one week later on January 29. The latest polls, of which there are few, show incumbent President Francois Hollande, running neck and neck with current Prime Minister Manuel Valls. This will be another race worth watching in the coming weeks, as Mr. Valls often runs at or below the voting percentages registered by Mr. Hollande in the polls versus his opponents in the presidential election.

In the meantime, the other key event coming in the next couple of weeks is the vote on the Italian referendum on Sunday, December 4 that may seal the fate of Prime Minister Renzi and his government, thus opening the door for the Eurosceptic Five Star Movement to potentially fill the void.

The Bottom Line

Now is not the time for complacency. Although stocks have raced to the upside in the wake of the U.S. presidential election, we are witnessing the world beginning to change before our eyes. This is a process that has the potential to continue for some time and bring with it periods of unexpected turbulence and downside volatility along the way.

And don't rely on the polling data to draw any conclusions. They have been famously wrong over what has been a tough 2016 for pollsters. And just because any given candidate might have a solid lead over Ms. Le Pen in a run off, it does not mean that she could not meaningfully close the gap if not win outright before it's all said and done.

So proceed with caution both with stocks in general and both in the U.S. and Europe (BATS:EZU) in particular. A change is coming, and with that change is likely to come policies that may not be so directly supportive to stocks as they have been in the past under the steady flow of monetary liquidity. And with each successive voting outcome, we learn a little bit more about how things are most likely to play out at the end of the day.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.