How do UK general elections impact the stock market?

General elections can have a profound long-term effect on the economy and people’s lives. It gives the public the chance to decide whether they want to re-elect the existing government and stick with the status-quo or seek change by voting for the opposition. Ultimately, elections let the country award a political party (or parties) a mandate to govern the country and introduce policies that can impact everything from housing to healthcare.

But the impact of elections on the stock market is less understood. Analysing the market’s performance during the last seven UK elections, there is no definitive pattern as to how markets react to such an event. However, there are lessons to be learnt that can help both investors and traders prepare for the next election.

What happens to the stock market during an election?

The above chart shows how the FTSE All-Share – which tracks firms listed on the London Stock Exchange's Main Market and regarded as a broad measure of the UK stock market’s performance – fared before, during and after each election that was held between 1992 and 2017. It shows how it performed in the six months before the election was called, between the election being called and being held, on the day after the election, and during the six months after the election.

1992 election

The UK was not in a good state in the months before the 1992 snap election. The Conservatives were grappling with the country’s economic woes. The UK was emerging from a lengthy recession, but unemployment remained high, house prices had collapsed, and interest rates were in the double digits. This was reflected in the market, which had fallen 4.4% in the six months before the election was called on 11 March.

The government also had the added challenge of winning support for its new leader, John Major, who had taken over from Margaret Thatcher in 1990. That was made more difficult by some of his controversial decisions, such as the introduction of council tax and getting the UK involved in the Gulf War. Plus, divisions had started to emerge in the Conservative party after Major signed the Maastricht Treaty that agreed co-operation among EU states would expand beyond trade and commerce. This angered some of his MPs that were against further cohesion with the bloc, who also feared the UK could join the euro following Black Wednesday, when Major pulled the pound of the Exchange Rate Mechanism.

This led many to believe that the Conservatives were on their way out after 13 years in power. The polls suggested there was not much between the Conservatives and Labour (under Neil Kinnock) in the run-up to the election, but those that did show a winner suggested Labour was marginally ahead. With markets uncertain as to who would win and concerned about a dramatic change in policy after a decade, the FTSE All-Share fell 4.1% in the 29 days between the election being called and being held on 9 April.

It therefore came as a shock when the Conservatives won a majority (albeit a much weaker one), but markets responded positively, rising 5.9% on the day after the election and gaining 3.2% in the subsequent six months.

1997 election

Economic growth began to accelerate in the UK in 1997 but the Conservatives were not being given any credit. In the six months before the election was called on 17 March, the market had risen by 8.9%. It had become clear that voters had run out of patience with the Conservative government. The divisions over Europe were getting deeper and the public had lost patience with Major, who failed to compete with his new counterpart in the Labour party, Tony Blair. While the Conservatives were seen as leaning further to the right, Blair’s introduction of more centrist policies under ‘New Labour’ was a winner with the public.

With polls firmly pointing to a Labour win, markets had some level of certainty to work with, which meant markets continued to rise and were undeterred between the election being called and held. Labour ended up destroying the Conservatives at the polls, winning a majority of 179 seats. Markets continued to rise in the six months after the vote on 1 May, increasing 6.5%. The rise after the vote was partly driven by the decision made by chancellor Gordon Brown to give the Bank of England independence from political interference to try to 'break from the boom bust economics of previous years'.

2001 election

There was little doubt that Labour was set to win a second term in office when Blair called the election on 8 May. The party had successfully defended all its seats that had been contested in by-elections and the economy had continued to improve. However, the stock market had declined 8.5% in the six months before the election was called following the dot-com bubble that gripped the market in 2000. Meanwhile, the image of the Conservatives, now under the leadership of William Hague, had not improved.

Labour comfortably won the election on 7 June as anticipated, securing over 40% of the vote. While Labours re-election provided a short-lived bounce in the stock market, it quickly started to decline after the vote, falling 11.4% in the six months after the vote on 8 May. This was partly driven by a drop in markets around the world following the 11 September attacks in the US, which led to a wider downturn in 2002.

2005 election

The UK economy was racing ahead by 2005. For example, real gross domestic product (GDP) per capita had grown much faster in the UK than in the US, Germany or France, and the stock market had risen 7% in the six months before the election was called on 5 April. Labour capitalised by boasting the strength of the economy during the campaign and the polls consistently suggested that Labour were set to win their third term in office. However, there was some uncertainty about Labour’s prospects following a steep drop in Blair’s popularity following his decision to invade Iraq.

Labour won the election but its majority was considerably weaker than when it came to power in 1997. The Conservatives secured 32% of the vote to narrowly trail Labour’s 35%, which was the lowest of any majority government elected before. Markets started to rise at an even faster rate once the market knew it would be dealing with another Labour government, up 11.5% in the six months after the vote on 5 May, partly because of the party’s commitment to continue spending on things like education and healthcare.

2010 election

The 2010 election was markedly different. Tolerance for Labour was being tested, especially after Gordon Brown took over at the helm. The economy was still in tatters following the financial crash of 2007/08, and the Conservatives were calling for a more fiscally-responsible government to take over. However, it became clear early on that the public was indecisive, with the polls suggesting the UK was heading for a rare hung parliament, whereby no single party has a big enough majority to govern alone. This was partly fuelled by a resurgence in support for the Lib Dems, which had poached disheartened Labour supporters.

The market was on the rise before the election was called, up 12.4% in the six months prior to 6 April. But the market quickly deteriorated once Labour announced the vote, falling 7% in the 29-day campaign in the lead up to the election being held on 5 May.

The predictions proved true as the election produced a hung parliament. This resulted in the Conservatives, led by David Cameron, and the Lib Dems, led by Nick Clegg, forming a coalition government. It took five days to agree terms, which was reflected in a 1.4% drop in the market on the day after the election. However, the market began to recover once a government was in place and some certainty was installed, rising over 10% in the six months after the vote.

2015 election

The UK and global economy was on the road to recovery from the financial crisis by 2015, with the market rising 4.9% in the six months before the election was called on 30 March. Still, most people were still worse off, remained disgruntled, and had lost appetite for coalition governments, which tend to be less decisive as compromise is needed. Once again, polls couldn’t identify a clear winner and predicted yet another hung parliament, which limited the stock market to a very small gain between the vote being called and held on 7 May.

However, the polls underestimated the Conservative vote, as well as how much blame had been put at the door of the Lib Dems. In fact, the British Polling Council launched an inquiry into how the polls got it so wrong. The Conservatives won an outright majority of 98 seats while the Lib Dems were punished after breaking several pledges during the coalition years, such as the U-turn on university fees. The outright majority initially pleased the market, which rose 2.4% the day after the election. However, the Conservative win came with a huge caveat – holding the EU referendum, which ignited huge concerns for the market, which declined 7.3% in the following six months.

2017 election

Having been picked as leader of the Conservatives, Theresa May tried to rally support for her Brexit plans by calling a snap election in 2017 with the hope of securing a mandate for her Withdrawal Agreement. However, 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 of Northern Ireland to remain in power. Polls had consistently suggested that the Conservatives would be re-elected, but the party’s lead was getting smaller the closer it got to the election itself – leaving some uncertainty for the markets.

The market had risen 3.2% in the six months before the election was called on 18 April, and increased a further 3.9% between the announcement and the election being held on 8 June (which was a longer period than usual, at over 50 days). However, that came to an end once it was revealed that the government’s position had been weakened, which also injected more unwelcome uncertainty over Brexit. The market failed to gain much traction in the six months after the vote, managing to edge just 0.3% higher.

Elections and the stock market: what lessons have been learnt?

Markets prefer predictable elections rather than close-calls

The worst enemy of any stock market is uncertainty. The market has tended to perform better in the run up to an election being held when it is fairly confident about who is going to win. The market continued to gain ground before, during and after the election in 1997, when Labour’s victory was widely anticipated. Similarly, a rampant rise in the market ahead of the 2010 election was brought to halt when the vote was called because it was unclear who would win, sending prices lower. But the markets began to rise again once the new coalition government was formed because this provided some certainty.

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. This even happened in 2010, when polls successfully predicted a hung parliament. The market had been growing strongly before the election was called but started to suffer losses during the campaign, only to pick up once again after the coalition government had been formed.

Markets tend to prefer a Conservative government over a Labour one

Although the ideology of a political party does change, the fundamental beliefs of major parties tend to remain the same. Conservatives believe in free markets and capitalism, and are therefore regarded as the party for business, while Labour leans more toward socialism and workers unions, which generally aren’t favoured by industry.

A larger study by the Stock Market Almanac shows Conservatives and Labour won the most seats in nine general elections each between 1945 and 2010 (2015 and 2017, although not included, were both partly skewed because of Brexit). 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%. A paper published in the Applied Financial Economics journal that studied a similar time period suggested there is 'a clear preference for a Tory government'.

Elections can cause short-term volatility but often have minor impact in the long term

However, 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.

But the market has followed the same path before and after an election in the majority of years that one has been held, suggesting elections do not influence the market over the longer term.

Ultimately, markets are driven by much more than just politics

The stock market is influenced by everything that is happening in the world, so the impact of elections and politics in general is limited. It is hard to pin down the precise effect of elections as the market is also reacting to the multitude of other events happening at the same time. For example, is a decline in the market being driven by the uncertainty over the election, fears of a recession, or because there is an oil crisis brewing?

The economy, and therefore businesses and markets, keeps ticking along regardless of what’s happening in Westminster. An election certainly influences the market, but so does everything else.

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How will the stock market perform in the next UK election?

The next general election is not pencilled in until 2022. But the UK is widely expected to hold a snap general election sooner rather than later, potentially as a way of giving the public a choice of how the country should handle Brexit. UK Prime Minister Boris Johnson has already asked the House of Commons for permission, but was denied by Labour. Labour has been calling for an election ever since Jeremy Corbyn took over as leader, but it has refused to approve the plan to hold an early election because it fears Johnson is using it as a mechanism to allow the UK to leave the EU without a deal at the end of October. The party has said it does want an election, just not on Johnson’s terms.

We have established that markets like certainty and being able to predict the outcome of an election. With this in mind, the Conservatives are currently polling (as of September 2019, according to an aggregation of polls by Britain Elects) at 33%, well ahead of Labour at 25%. However, the two-party political system has been shattered and smaller parties are more prominent than before – with the Lib Dems polling at 19% and the Brexit Party at 13% - which raises the likelihood of a hung parliament or need for a coalition, which markets don’t like. Plus, voters are choosing sides based on where they stand on Brexit, meaning support can be lost as quickly as it has been gained. If Johnson’s willingness to take the UK out of the EU without a deal disappears, or there is another delay to Brexit, then swathes of voters could move to the Brexit Party. The vote is also split on the other side because Labour has lost votes due to its unclear position on Brexit and because the Lib Dems have rallied Remainers from all parties with their commitment to revoke Brexit altogether. All in all, there isn’t the predictability that markets enjoy.

In addition, both the Conservatives and Labour have left the centre, which means there could be radical change regardless of which way the vote turns out. Conservatives are catering to the right-wing of the party and championing no-deal Brexit, while Labour has moved to the left and promised a slew of anti-business policies, such as renationalisation and higher corporation tax. The majority of UK businesses don’t like the idea of either, but any certainty would be welcomed.

Over the longer term, markets tend to move in the same direction after an election as they were before it was called, barring any sudden surprises or miscalculations by the polls. The FTSE All-Share has moved just 0.2% over the last six months, making it difficult to gauge where it will go – but it has rallied more than 9% since the start of 2019, which paints a more positive picture. However, the economic backdrop – being dictated by fears of a recessions, international trade wars, anti-globalisation, and Brexit - will be vastly different to any election that has been held before. If Brexit remains unresolved when the next election is held, then it will remain the over-riding issue – and markets should expect the unexpected and prepare for fickle voters.

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What should investors and traders do to prepare for the next election?

The next election could be just around the corner and investors and traders must prepare before it is called if they want to avoid any surprises that occur when it is finally called. One of the best tools to use both before and during the election campaign is the polls. They aren’t perfect and don’t always get it right, but it’s the best way of judging the public’s voting intentions. Watch as many polls as possible – sample sizes for each individual poll are usually just a few thousand people, so you have to aggregate them to get the full picture and to spot any obvious discrepancies. For example, the latest September poll by Opinium suggests the Conservatives have a 12% lead over Labour while one conducted by ComRes puts the lead at just 1%. Britain Elects is one organisation that collates British Polling Council-approved polls. It also tracks the public’s view on Brexit, which can be another tool to help judge which way people might vote.

You can get a better insight as to how the next government may impact specific industries once each has published their manifesto. Manifestos can help traders spot more opportunities.

Top defensive stocks to protect your portfolio

For traders, elections can inject some welcome volatility to capitalise on, not just in stocks but also the likes of the pound, which is continuing to fluctuate because of the uncertainty of Brexit.

What you need to know about the next UK general election