Are elections irrelevant?

Some observations

Autumn 2024 is set to see a Presidential election in the USA and a general election in the UK and in both cases, opinion polls are currently indicating that change is afoot. By the end of the year, US President Trump may apparently be greeting UK Prime Minister Sir Kier Starmer to discuss the great affairs of state and international politics.

Elections always affect stock markets, due to the increase in uncertainty and this is particularly so at present, given the history of President Trump’s first term and the longevity of the UK Conservative government that we are told is to lose power.

Elections and the changes they bring can have huge effects on domestic and international economic policies, but perhaps surprisingly, there is little evidence that they have much medium or long-term effect on stock markets.

A recent study by US Bank of the short-term effect of US Presidential elections showed that in the year leading up to an election, the total return from US equities and US bonds were on average lower than in non-election years, at +6% vs +8% for equities and +6.5% vs +7.5% for bonds.

This however is typically recovered very quickly, so that for the past 10 elections, spanning the 40 years going back to President Ronald Reagan, on eight occasions the following year showed stronger performance and on only two did it show weaker performance.

So, if that pattern were repeated, we should perhaps expect this year to be volatile and nervous as it wears on, but 2025 to give compensating strong returns and the net impact of the Presidential election would be inconsequential.

But what of the UK?

The Conservative Party has been in power alone or in coalition for over a decade, so the changes of direction of policy under a possible Labour government could be very significant.

History however again suggests that any effect on stock markets is likely to be short lived. When John Major was re-elected Prime Minister in 1992, the period leading up to the election had seen weak stock markets and this reversed in the six months after it. However, in all subsequent five general elections leading up to Theresa May in 2017, post-election the Stock Market quickly resumed the direction it had been following previously. Boris Johnson’s election in 2019 was of course followed by the arrival of covid and so broke the trend.

In many ways, that is probably the lesson of these observations; do not worry about elections, there are more significant effects at work that certainly will influence stock markets and we should spend our energy looking instead at those.

If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here or contact me direct: peter.land@capitalfinancialmarkets.co.uk

Peter Land, January 2024