As 'Geo' Becomes a Prefix of Woe, Buy 'Best of British'

 | Apr 21, 2017 | 2:22 PM EDT
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Sell in May and stay away? That's the question facing investors with one trading week remaining in April. As we move into summer, one prefix is on traders' lips: geo. Not General Motors' (GM) ill-fated Korean-made small car brand, but geo as in geopolitics. Traders use "geo" as shorthand for any political occurrence that could upset markets, and in the last 12 months we've seen two -- Brexit and the election of President Trump -- that caused pronounced moves in markets in both directions. 

So what's on the "geo" docket for the summer of 2017? Quite a bit, and probably enough to temper some of the bulls' enthusiasm, especially since pollsters have proven so reliably unreliable at predicting voting results. 

First up is the French presidential election on Sunday. If no candidate wins a majority of the vote in the first round -- and that has never happened in modern French elections -- there will be a runoff election on May 7. I am not going to refer to polls here, because as I mentioned above, they have been totally useless of late. I think it's fair to say the markets want status quo, however, and the two more centrist candidates, Emmanuel Macron and Francois Fillon, would be preferred to the candidates on the outer edges of the political spectrum, Marine Le Pen of the National Front and ex-Communist Jean-Luc Melenchon. Both Le Pen and Melenchon have pushed the idea of "Frexit," and such an outcome would be the last thing European investors want to see. 

There's almost zero chance that things will be resolved Sunday, and look for much more political noise coming out of France until May 7. Also, remember that France holds its parliamentary elections in a two-round process June 11 and 18, so there will be further uncertainty even after the presidency is determined. 

Across the Channel, British Prime Minister Theresa May has called for snap parliamentary elections on June 8. Unlike the situation in France, this election will likely only serve to strengthen May and her Conservative Party ahead of Brexit, which is scheduled to be concluded by March 2019. With the main opposition party, Labour, in complete disarray, May's Tories are likely to emerge with a massively increased majority in the 650-seat House of Commons. 

So the safe trade is to -- as I said in the Real Money column I wrote while bleary-eyed on the morning of June 24 -- buy the "best of British." Interestingly, the Financial Times Stock Exchange 100 had its worst week since November this week, falling 2.91%. The logic is twisted: If British stocks are falling because of worries about the French election at the same time that May is likely to have a parliamentary majority her party has not seen since the days of Margaret Thatcher -- to whom she is often compared -- and possibly a majority not seen since the 1920s, that just makes no sense. I think Britain is (pardon the pun) an island of stability in global markets, and I want to own those stocks. 

Finally, on "geo" there is the matter of our own president, whose party also has a legislative majority not seen since the 1920s. The markets wobbled on the failure of the initial version of the Affordable Health Care Act, but I wouldn't bet against Trump just yet. I believe an overhauled version of the AHCA will pass in the next few months. That should open the floodgates for what the market really wants, tax reform. Treasury Secretary Steven Mnuchin has been dropping strong hints this week that the administration is ready to cooperate with Republicans in Congress on tax reform. If -- and yes, that is a big if -- Washington can actually agree on the first real reform of the tax code in 31 years, that would be an undeniable positive for stocks. 

I don't mean to understate the "geo" risks from rogue states like North Korea and the seemingly endless wave of jihadist terrorism all over the world. Those factors are inherently unpredictable, however, and in terms of upcoming electoral and legislative events, there seems to be less to worry about -- with the exception of France -- than in the summer of 2016.

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