Elections, Markets, and the Power of Certainty: What you need to know
As a training provider specialising in the financial services and insurance sector, we understand the importance of keeping our clients informed about the trends affecting our industry, including the election impact on financial markets. In this regard, the calling of a surprise election by Prime Minister Rishi Sunak is an event that deserves our attention.
Rishi Sunak has called an election on the 4th July, but what might this mean for the UK stock market?
As we approach the upcoming election, it’s crucial to understand the relationship between political events and financial markets. This understanding can empower individuals and firms in the financial sector to navigate uncertainty with confidence.
Election impact on financial markets and market volatility
Elections are inherently linked to a certain level of market volatility. This phenomenon is less about who might win and more about the uncertainty surrounding the outcome. Markets, much like people, don’t like uncertainty. They crave predictability and stability. Historically, every election brings a level of uncertainty, causing ripples in the financial markets. This volatility, however, tends to be temporary, subsiding once the results are known and a new government is in place.
Historical context and data
Consider the last eight general elections in the UK. Each has brought its own share of market turbulence. For instance, the 1997 election saw Labour’s win widely anticipated. This certainty helped stabilise the market, reducing the usual volatility that accompanies elections.
This example underscores a critical point: it’s not necessarily the outcome of the election that matters to markets but the certainty of that outcome.
Research by AJ Bell, spanning 16 general elections since the FTSE All-Share’s inception in 1962, reveals a fascinating pattern. The FTSE All-Share has recorded double-digit gains on average in the year following a change in government. This trend suggests that markets tend to react positively once the uncertainty of an election is resolved, regardless of which party comes into power.
Market performance under different governments
There’s a common belief that markets perform better under Conservative governments. This perception likely stems from the pro-business stance typically associated with Conservative policies. However, when we look at the data, there is no definitive evidence to support this claim.
Over the life of a parliament, the overall impact on the market tends to even out, regardless of which party is in power. This is a crucial insight for investors and financial planners: the broad impact of different governments on market performance is often similar over time.
The real drivers of market performance
To understand what really drives market performance, think of the stock market as a ship navigating through the ocean. Elections are like sudden storms, causing turbulence. However, the ship’s course is ultimately determined by the skilled hands at the helm and the condition of the vessel itself, not just the weather. Governments often react to events rather than shape them entirely. Global events, economic policies, technological advancements, and social changes all play significant roles in market dynamics.
For example, consider the global financial crisis of 2008. The crisis had a profound impact on markets worldwide, regardless of the governments in power at the time. Similarly, technological advancements such as the rise of the internet and digital technologies have driven market performance in ways that transcend political changes.
These examples highlight the multifaceted nature of market influences and the relatively limited role that political events play in the grand scheme of things.
Empowering financial decisions amid uncertainty
Understanding these dynamics can empower both individuals and firms in the financial sector. When we recognise that markets are influenced by a multitude of factors beyond the control of any single government, we can better prepare and adapt to changes. This involves focusing on long-term strategies, diversification, and sound investment principles.
During periods of political uncertainty, it is crucial to avoid hasty reactions. Instead, maintaining a diversified portfolio can effectively mitigate risks associated with market volatility. Diversification involves spreading investments across various asset classes, thereby reducing exposure to any single risk factor. This approach ensures that if one investment underperforms, others can help balance the overall portfolio’s performance, much like not putting all your eggs in one basket.
Moreover, it’s important to stay informed and adaptable. Keeping abreast of global economic trends, technological advancements, and social changes can provide valuable insights into potential market shifts. This proactive approach allows investors to make informed decisions and secure opportunities that arise during periods of uncertainty.
Real-life examples abound of successful firms that have thrived by adapting to political changes rather than fearing them. Consider how some of the world’s leading companies have navigated political uncertainties by focusing on innovation and long-term growth. Companies like Apple, Amazon, and Google have continued to grow and thrive despite various political changes in their respective home countries. Their success stories illustrate the importance of resilience, adaptability, and a forward-looking approach in the face of uncertainty.
Navigating the financial storm
While elections can sometimes bring a storm of uncertainty, they are just one of many factors influencing the stock market. By understanding this, we can better prepare and adapt, ensuring that our financial journey remains on course. Remember, the power lies in our hands to make informed decisions, no matter who sits in government. Let’s navigate these uncertain waters with confidence, knowing that the market, much like life, finds its balance in the long run.
In this journey of financial and political tides, let’s anchor ourselves in knowledge and resilience. By focusing on sound investment principles, staying informed about the election impact on financial markets, and maintaining a long-term perspective, we can weather the storms of political uncertainty and emerge stronger on the other side. Just as a well-navigated ship reaches its destination despite the storms, so too can our financial strategies lead us to success, regardless of the political climate.
By Shaun Coleman FPFS, Head of Financial Services at Skills Edge Training