This article first appeared in the Telegraph

The timing of the next election may be uncertain, but we know it is on its way sooner rather than later. A good time, therefore, to look at the impact of past elections on the markets and what if anything we can discern about how the next one will influence our investments.

There is a wealth of literature on the link between the electoral cycle and stock markets but it pretty much all refers to the much more predictable US Presidential cycle where Government spending follows a more reliable pattern, designed to improve the incumbent’s re-election prospects.

In Britain, notwithstanding the ill-conceived Fixed Term Parliament Act that is currently tying the Prime Minister up in knots, elections are a more ad hoc affair. Spotting a meaningful connection between the electoral and market cycles is harder.

There have been seven general elections in the 30 years that I have been following the markets and they have all demonstrated very different pre- and post-election patterns from a market perspective.

The performance of markets in the period before the elections were called, during the campaign, on the day after the election and in the six months that followed has generally had little to do with which party has won, although there is some evidence that markets do prefer the ostensibly business-friendly policies of the Conservatives (rather less in evidence today than in the earlier years of this analysis).

Rather it reflects both what is going on in the broader world economy and, as important, the level of certainty (or lack of it) about who will win the election. If we can draw any firm conclusion from the past three decades, it is confirmation of the old adage that markets dislike nothing more than uncertainty.

So, back in 1992 the dominant influences on the market were a dire economy and a Tory party split by Maastricht (plus ca change). The polls suggested John Major and Neil Kinnock were neck and neck, but with Labour marginally ahead. The FTSE 100 unsurprisingly built, during the campaign, on the losses chalked up before the election was announced. When, unexpectedly, the Conservatives won a small majority, the market welcomed the devil it knew. The market rose both on the day after the vote and during the following half year.

Although 1992 was the exception that proves the rule, another conclusion to draw from the data (for which I’m grateful to IG Index) is that, more often than not, markets tend to pick up on their previous direction after pausing during the campaign itself. 

The next election, in 1997, was a good example of this. By this time, the Conservative government had pretty much given up and it was given no credit for the economic pick-up in the early stages of the internet boom. But the markets were moving higher and when the anticipated Labour victory duly arrived, investors welcomed Gordon Brown’s decision to grant the Bank of England independence and shares rose both ahead of and after the election.

The 2001 election was another good example of the irrelevance of domestic politics in the face of greater economic forces. While Labour cruised to an easy re-election, the markets had already cracked as the dot.com bubble burst a year earlier. Having fallen by 9% in the run up to the election, shares fell another 11% in the months that followed, not helped by the attacks on the Twin Towers.

The 2005 election made the same point in reverse - a Government losing the trust of the people in the wake of the invasion of Iraq was given the benefit of the doubt against a backdrop of (unsustainable) economic boom. The UK stock market rose by 7% in the run up to the 2005 election and by a further 12% in the six months after as the spending taps remained wide open.

With the benefit of hindsight, the financial crisis was just as much a political as an economic watershed for the three elections since then have been altogether more unpredictable affairs.

The polls ahead of the first of these pointed correctly to a hung parliament and markets balked at the prospect. Having risen strongly in the run up to the vote as markets recovered from the 2008 crash, the UK fell by 7% during an uncertain campaign period. Although shares continued to rise after the election this was despite not because of any enthusiasm for the gridlocked policy agenda of a loveless coalition Government.

The elections since 2015 have naturally been dominated by Brexit and the fragmentation of UK politics that it has caused. Not for nearly a decade have markets welcomed an election result. Shares fell 7% in the six months after May 2015 as we began to understand what David Cameron’s rash pre-election referendum promise actually meant (and let’s not forget Chinese growth fears, which spooked markets the world over). After Theresa May’s 2017 debacle, the election when Britain’s traditional two-party politics expired, shares trod water for six months.

The hung parliament of 2010 now looks like a template for the future - the great irony of leaving the EU is that our politics is becoming ever more European. It’s not hard to see why the Prime Minister wants to neutralise the Farage threat by going to the country before he becomes the man who didn’t deliver Brexit.

Parliamentary gridlock is not necessarily bad news for investors. What it is likely to mean is that stock markets will focus more and more on the global economic picture than on increasingly ham-strung domestic politics. With the lagged impact of loosening monetary policy and the chance that both trade tensions and Brexit could be resolved in due course, 2020 may be a better year for investors than heightened political uncertainty on both sides of the Atlantic would suggest.


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