March 18, 2017    4 minute read

Predicting the French Elections: Sentiment Data and Market Reactions

Investing Needs Context #PGC    March 18, 2017    4 minute read

Predicting the French Elections: Sentiment Data and Market Reactions

Investors have always had to debate how politics affects markets, but it is now a growing source of uncertainty. As last year showed, unpredictable events can radically change assessments of current and future investments. What people think will happen and the assumptions they make are proving less useful than before.

Politics Affects Markets More than Ever

How are investors reacting? It seems the failed predictions of the past year are fuelling distrust towards previously relied upon methods such as opinion polls and mainstream media commentary. Instead, they are choosing to hedge their bets. This is clear with the recent election in the Netherlands and the coming one in France.

French & German Bonds

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The German 2-year bund, for example – widely perceived as a safe haven asset – is deep into negative yields and recently hit all-time lows. Equivalent French bonds have been unable to keep pace ahead of the election, indicating that investors are not taking chances.

Is That the Right Reaction?

Perhaps investors are being too cautious and overcompensating for their previous mistakes. Using sentiment data compiled by Amareos can give a clearer sense of what is reality and what is hype. Despite all the speculation that the populist-nationalist wave could potentially bring Wilders to power in the Dutch elections, the crowd’s dissatisfaction with the incumbent government was nowhere near strong enough to generate another political upset.

Amareos Government anger vs polling

Government Anger vs 1st and 2nd round polling of the French Elections (Amareos.com)

The situation in France is somewhat different. The level of anger at the government according to Amareos has surged in recent months, a trend that can be compared with Le Pen’s polling metrics. This tells an interesting story. It shows that with rising anger against the government, she rises in the polls. So how much does she actually need to take the title of the French presidency?

Do Not Confuse The Issue!

The better question is: how angry do people need to get? Using the same logic, one would assume that a similar percentage rise in anger would lead to an equal lift in the polls for Le Pen. However, taking another strategic step back, it’s worth nothing that the current anger against the government is already at its highest point in recent history.

Crowd Sourced Sentiment: Government Anger The market mogul

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Therefore, the French people would have to be at an incredible level of anger unseen in recent times. Is that likely? Arguably not.

…the current anger against the government is already at its highest point in recent history.

What Does This Mean?

It means that markets are not behaving like unemotional rational thinkers. They are getting caught up in their previous failures and are therefore biased towards overcompensating for them. It also means investors are not seeing the entire picture. Most investors do not know what the crowd is thinking, nor what other investors are thinking. To make the best rational decision requires knowing the context that surrounds a position: in other words, better and more useful information.

So What Do We Do About It?

Surprising as this might sound, knowing what, say, the next non-farm payroll number will be does not really help investors. What matters is how people are going to react. That way, investors can – on a simplistic view – do the opposite and reap the rewards. But how can we know what will happen and what people will do about it?

Information is useless without context.

Sentiment data updated on a daily basis by Amareos contextualises the information that is already readily available. Whether it be understanding that markets are being too emotional about their previous decisions and no longer trust themselves, or clarifying how the crowd really thinks, it helps to form a better understanding of the ‘now’. Knowing how the crowd thinks and where the markets’ momentum is heading gives investors more than prices and the indicators.

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Sentiment data shows that investors are nervous and are being cautious as a result of the right-wing movement sweeping Europe. This gives a clear picture of where the crowd of investors are moving. But sentiment data also produced solid clues as to where the crowd of voters may be heading, and places that into context – which, in today’s world. is powerful data indeed.

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