Mark Creed
Private Client Director
In 2024, just under half the world’s population will take to the polls in what has been dubbed the “year of elections”. Time reports that elections will be held in at least 64 countries, plus the European Union, the results of which will likely prove consequential for years to come.
As well as a likely UK general election, and the US presidential election in November, results in countries including India, Mexico, Russia, South Korea, and Iran will shape policy decisions not just locally, but globally.
So, as billions of voters head to the ballot box, what could this “year of elections” mean for investors?
Investors hate uncertainty
By their very nature, elections can create uncertainty – especially if the likely outcome is close. In the middle of February 2024 the US presidential election is too close to call, with the Economist reporting that just three percentage points separating former president Donald Trump from the incumbent, Joe Biden.
The concern is that investors tend to dislike uncertainty, and close-run elections can cause volatility. In the run-up to close elections, market activity can stall as investors take a more cautious approach.
Conversely, if the outcome is reasonably certain, markets often post gains before, during, and after the election.
In 2010, dissatisfaction with the incumbent Labour administration, and a surge in Liberal Democrat support meant that the UK general election was too close to call. The market, which had been rising for much of 2010, began to stagnate in the build-up to polling day.
When the results were in, the picture became even less clear. The political negotiations to form a coalition government were then underway, and Moneybox reports that the FTSE 100 lost 4.04% between 6 May (election day) and 6 June.
However, once the new coalition government had been formed and certainty was restored, markets began to rise once more. Indeed, the FTSE 100 posted a gain of 12.57% from 6 June 2010 to 6 December 2010.
In contrast, the outcome of the 1997 general election was much more certain. In the run-up, all experts predicted Tony Blair and New Labour to win, and win comfortably.
The FTSE 100 confirmed this confidence, with the index rising 12.1% between 25 April 1997 (one week before the election) and 1 August 1997 (three months after the result was announced).
A change of UK government has historically boosted returns
While a more certain election result can provide a fillip to markets, a change of government has also, historically, boosted stock market performance.
The Times reports that in the 12 months after general elections that led to a change of government since 1962, the FTSE All-Share index rose an average of 12.8%. When the governing party won the election, the index returned an average of 0.9%.
Source: The Times
This evidence suggests that markets like change, and so a Labour victory at the next general election could provide a boost to markets.
Evidence from the US tells a similar story and reveals that markets tend to generate positive returns in election years.
Research by Morgan Stanley shows that in the 23 presidential election years since the S&P 500 began and 2016:
- 19 of the 23 years provided positive performance
- When a Democrat was in office and a new Democrat was elected, the total return for the year averaged 11%
- When a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%.
As in the UK, a change in the party in power produced superior results in the election year.
Second-term US presidents often mean lower returns
All signs point to the 2024 presidential election being a repeat of the 2020 election as Joe Biden takes on Donald Trump for the White House.
This contest would represent the seventh presidential rematch, with the most recent being Dwight Eisenhower and Adlai Stevenson in 1956. However, history is against Trump as only one individual has been elected to a second non-consecutive term as president: Democrat Grover Cleveland, when he regained the presidency from his Republican rival Benjamin Harrison in 1892.
A Biden versus Trump race means that, in either case, we will have a second-term president.
Analysis by Schroders shows that returning presidents have generally seen lower nominal returns across major asset classes (with the exception of 10-year Treasury yields).
This would suggest that, irrespective of the outcome, returns across major asset classes in the US could be lower over the next four years than the previous four.
Election outcomes should not affect your long-term thinking
While data can point towards historical trends when it comes to the link between elections and returns, US Bank concludes that general economic data is much more significant than politics when it comes to forecasting market performance.
Their research says: “In general, rising economic growth and falling inflation have been associated with returns that are considered above long-term averages, while falling growth and rising inflation have corresponded to positive but below average market returns.
“For investors, staying focused on these patterns is probably more insightful than potential election outcomes when it comes to predicting market performance.”
It’s also important to remember that the short-term impact of elections – and other macroeconomic and geopolitical factors – should not influence your long-term decision-making.
Investing is typically a long-term pursuit and, consequently, you shouldn’t usually make decisions about allocations based on who is in office or the likely outcome of an election.
Factors such as ensuring that you have a well-diversified portfolio aligned with your tolerance for risk are likely to be more important than transient events.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
