Is there a connection between stockmarket returns and general elections? A link does appear to exist, at least on paper.
Every general election for the past 25 years, and its immediate aftermath, has been accompanied by a modest – but still significant – rise in UK stockmarkets, according to research from Bestinvest, a firm of financial advisers based in London.
The company looked at all of the general elections over the last 25 years (May 1979, June 1983, June 1987, May 1992 and May 1997) and found that on average the stockmarket returned 4% during general election months.
This compares to an average monthly return on the FTSE All Share of 1.43% over the last 25 years. Perhaps more importantly, four of the last five general elections produced monthly returns of more than double the average.
The rise appears to occur not only just before the election but also in the immediate weeks afterwards, as City traders digest the implications of a particular party’s victory.
For investors hoping to make a quick return on capital, therefore, this could be the last chance to get involved. Even then, if statistics are to be believed, some of that opportunity has already been lost: on the day the election was called, Tuesday 8 May, the FTSE-100 share index hovered around the 5,885 level. Mid-way through the campaign, on Tuesday 26 May, it closed at 5,976, up about 1.5 %.
Despite this apparent statistical blip, experts are not clear whether there is a single cause that unites all the stockmarket election increases of the past 25 years.
Simon Rubinsohn, chief economist at Gerrard, the stockbroking firm, says: ‘I’m not sure there is a consistent explanation. If one wants to identify reasons why markets might have risen during the pre-election periods of the 1980s, it may be that the polarisation between Labour and the Conservatives at that period helped markets to behave aggressively.
‘They identified strongly with the Conservatives in 1979, 1983 and 1987. There was perceived to be a wide divergence between Labour and Tory, with the Tories being far more pro business. And in a context where Conservatives were more likely to win, it may well have been the case that markets reacted to this mood both before and after an election.’
But Rubinsohn adds that he does not believe a similar pattern existed during the 1990s. ‘It may be that markets were reacting to something else, the clarifying of uncertainties and the expectation of a decision being reached.
‘In the current election, it is true that there has been upward movement in the Footsie. But this movement probably reflects much more what is happening on Wall Street than the election itself. If anything, some point to the fact that markets are unaffected by events surrounding the election.’
Given Labour is widely predicted to win, and that the party is seen as more pro-European than the Tories, one might have expected the euro to gain against sterling. But if anything, sterling has strengthened slightly against both euro and the US dollar.
Hilary Cook, director of investment strategy at Barclays Stockbrokers, says: ‘There may have be an argument about what happens to markets after an election. The 1992 election was a cliffhanger and when John Major squeezed in markets would have reacted afterwards.
‘In 1997, markets had generally factored in the likelihood of a Labour victory. They did not believe in John Major’s political longevity any longer, they were prepared to trust Gordon Brown. And of course, he pleased the City hugely by announcing within a day or two of the election that he would leave interest rate setting to the Bank of England, without Treasury interference. Share prices rocketed.
‘The election this time around is a bit of a damp squib, so it’s hard to see the City being affected to the point where markets rise. But the City likes Gordon Brown, or at least it doesn’t think he’s singularly bad for the economy.
‘It is also the case that the City likes many of the things that come with Gordon Brown, such as low inflation, low interest rates, unemployment coming down and so on. All things that may have an impact on share prices.’
Jason Hollands, deputy managing director at Bestinvest, who carried out the research, accepts there does appear to be a link but urges caution, saying: ‘There does appear to be a statistical correlation between elections and market movements, but it is hard to argue that there is a single explanation for this.
‘There are, of course, numerous factors that can move short-term markets: greed, fear, war, natural disasters and political events to name a few.
Ultimately markets are driven by sentiment. It therefore stands to reason that when a general election is concluded the market and voters will breathe a sigh of relief if the result removes one less uncertainty for four or five years.
‘I guess one of the things that could be argued is that if share prices move regardless of what politician wins the election, investors should worry a bit less about timing and think more about entering the market regardless of the outcome.’
Visit AccountancyAge.com’s election area at www.accountancyage.com/News/1121781
Nic Cicutti is editor at the Financial Times’ personal finance website www.FTyourmoney.com.