General elections can have a profound long-term effect on the economy and people’s lives. The impact of elections on the stock market is less understood. Analysing the last seven UK elections, there is no definitive pattern as to how markets react, although there are historical patterns that may help investors and traders prepare for the aftermath of this election.
Elections past: 1992
In 1992, the UK was emerging from recession, but unemployment remained high, house prices had dropped, and interest rates were in the double digits. The FTSE All-Share Index had fallen 4.4 per cent in the six months before the election was called on 11 March. Many believed that the Conservatives were on their way out after 13 years, and the FTSE All-Share fell 4.1 per cent in the 29 days of campaigning. It came as a shock when the party won a majority and markets responded positively, rising 5.9 per cent on the day after the election and 3.2 per cent in the subsequent six months.
Economic growth began to accelerate in the UK in 1997, and the market had risen 8.9 per cent in the six months before the election was called, but the Conservatives were not being given any credit and many voters started turning to Labour and its dynamic new centrist leader Tony Blair. Labour ended up winning a majority of 179 seats. The markets rose 6.5 per cent in the six months after the vote, partly driven by the decision to give the Bank of England independence.
There was little doubt that Labour was set to win a second term in office when Blair called the election, and the party duly won. The stock market had declined 8.5 per cent in the six months before the election as the dot-com bubble that gripped the global market in 2000 burst. There was a short-lived bounce in the UK market after the election, before the declines resumed in line with falls in global indices.
The UK economy was racing ahead by 2005 and the stock market had risen 7 per cent in the six months before the election was called. Labour capitalised and won a third term in office, albeit with a reduced majority. UK equity markets started to rise at an even faster rate after the vote, up 11.5 per cent in the subsequent six months.
The economy was in tatters following the financial crash of 2007/08, but the UK got a rare hung parliament as Conservative messages of fiscal prudence failed to get it a majority. The party had to form a coalition government with the Liberal Democrats. The market was up 12.4 per cent in the six months prior to the election being announced, but fell 7 per cent during the 29-day campaign. It fell another 1.4 per cent in the five days it took the Conservatives and Lib Dems to form a coalition, but it began to recover once a government was in place and rose over 10 per cent in the six months after the vote.
The UK economy was starting to recover following the financial crisis, with the market rising 4.9 per cent in the six months before the election was called. Still, opinion polls predicted yet another hung parliament, which limited the stock market to a very small gain between the vote being called and held. In fact, the Conservatives won an outright majority, and the UK market rose 2.4 per cent the day after the election. It then fell 7.3 per cent in the following six months amid uncertainty around the EU referendum to be held the following year.
Theresa May was way ahead in the opinion polls when she called a snap election to try and get a parliament that would support her Brexit plans. This was a huge misjudgement and the Conservatives lost their majority, forcing them to sign a confidence-and-supply agreement with the Democratic Unionist Party to remain in power. The market had risen 3.2 per cent in the six months before the election was called, and increased a further 3.9 per cent between the announcement and the election being held. The market failed to gain much traction in the six months after the vote, managing to edge just 0.3 per cent higher, as Brexit uncertainties saw UK markets lagging their global peers.
Markets prefer predictable elections rather than close-calls
It’s often said that the worst enemy of any stock market is uncertainty. The market has tended to perform better in the run up to an election when it is fairly confident about who is going to win.
Markets tend to perform better after an election than before it is held
The market tends to pick up where it left off once the election is over. If the market was in decline before the election was called, then it is likely to continue that trend after the vote, especially when the winner can be predicted. The market was experiencing strong gains in the run up to the 1997 and 2005 elections, when Labour’s victory was comfortably predicted, and markets continued to rally after both elections delivered the result as expected. Similarly, the markets were in decline ahead of the 2001 election but recovered during the election campaign, only to start declining once again after the vote.
Markets tend to prefer a Conservative government over a Labour one
A study by the Stock Market Almanac shows Conservatives and Labour won the most seats in nine general elections each between 1945 and 2010. The market rose in eight out of the nine years the Conservatives came out on top and delivered an average annual return of 10.8%. However, the market only rose in three years when Labour won, and overall the average annual return was -5.8%.
Elections can cause short-term volatility but often have minor impact in the long term
The impact of elections is very short-lived. Uncertainty during the campaign can disrupt the direction of the market and cause it to become more volatile, and an unwelcome or surprise result can also provide a shock to the market immediately after the vote. While there are signs that the market performs better over the short term when a Conservative government is elected, there is no evidence to suggest the stock market performs better with any particular party at the helm over the lifetime of the government.
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