When a big moment in history takes place (like a general election), it’s safe to assume that financial markets will be affected due to how closely their performance is linked to the economy.
And if you’re an investor, then you’re probably wondering how the upcoming election is likely to affect your portfolio.
Now, before we get into the nitty gritty, one thing to mention is that at Wealthify, we ensure our customers’ Plans are well diversified – meaning that if you are a customer, your money will be invested across different types of assets and regions, so you’re not relying on just one – or a couple – to do well.
This means that UK specific events – like the General Election next month – may not have as great of an effect on your portfolio as you might think.
In fact, the impact that a general election can have on local market dynamics is pretty heavily debated and is mostly linked to what policies the markets expect to come about as a result of it.
But most of us already know that financial markets are not a fan of uncertainty. And the greater the expectation of a change in policy (which can be brought about by a change in Government), the greater the potential for market movements. After all, it’s natural for them – and the value of investments – to go down or up).
However, it’s important to note that sometimes in reality, things like Government policy changes can evolve over time, and they may take months or even years to come into play.
For this reason, we often see the initial market reactions - or overreactions - to election results ironing themselves out over the ensuing months and years. So, when it comes to how we manage our customers’ Investment Plans, we will be on the c short-term mispricing (if it does occur).
Looking back: what has happened during past General Elections?
In a nutshell, the reality is this year’s election is likely to have a mixed and unpredictable effect on UK markets. But one thing we can do though is look back at previous general elections and see how they have impacted them.
To do this, we ran an analysis on the 9 UK general elections that have taken place from 1987 to 2019 to see the average return from the FTSE 100, the FTSE 250 and the FTSE All Share. We examined 3 months prior to the elections, as well as 3 months, 6 months, 1 year and 2 years following each event.1
(The above data has been sourced from Bloomberg and relates to past performance. Please note that past performance is not a reliable indicator of future results)
The first thing to note is that the 3-month and 6-month numbers do not look great, but that can be expected when a political event like this takes place.
When looking at this, it is important to remember that we are long term investors. The reason for this is that by investing for longer periods, you’re giving the markets – and your investments – more time to potentially recover from dips like this.
And so, when looking at the 1 and 2-year numbers, you can see that all 3 markets (on average) are positive across the board.
Whilst it is difficult to look past this short-term volatility, it is clear that 1 and 2 years down the line, the result of an election may not matter much to markets at all.
Buy the rumour, sell the fact?
Another thing worth highlighting from looking at the data is the emergence of one of the more interesting stock market adages - ‘buy the rumour, sell the fact’.
We’ve seen that this often rings true and could provide a simple reason for the drop in market performance following elections.
And this term is actually often used to explain the psychology of traders who buy into an idea or rumour in the build-up to an event, but then once the event happens (or data is released on it), a sell off occurs.
This goes back to that idea of uncertainty, and that once investors become unsure of what’s going to happen, they are likely to sell their investments.
All this is to say that even though we do historically see a dip in markets following an election, we may only be losing the gains we have built in the run up to it – and this can be seen above as all markets were on an average positive in the 3 months prior to the elections.
These natural ups and downs in the market are nothing to worry about and should not distract from having a long-term view.
“The impact of politics on markets is often overshadowed by factors like inflation, global economic growth, and interest rates. Additionally, the divergence between economic policies has narrowed in recent years, focusing on pragmatic changes and financial stability without large-scale tax increases.”
Quote from Eric Silvestre, Senior Investment Analyst at Wealthify
What more proof do you need?
On a final note, I’ll leave you with this.
Below is a graph of the FTSE 100’s performance from its inception on January 3rd, 1984, until current day (just FYI, this blog was written on 31/05/24), with each election that has taken place since then highlighted.
(The above data has been sourced from Bloomberg and relates to past performance. Please note that past performance is not a reliable indicator of future results)
As you can see, despite there being many ups and downs along the way, the FTSE has always recovered following each election, regardless of the outcome. However, it’s worth noting that it could take a few years to do so.
Additionally, the most meaningful market drops have been caused by unpredictable factors such as the burst of the ‘.com bubble’ in the early 2000’s, the global financial crisis in 2008, and more recently, the Covid 19 pandemic in 2020.
Trying to ‘time the market’ (when to buy and sell) and predict what will happen following this General Election would not only be very difficult, but also unnecessary.
Over the long-term, the data suggests that markets will continue to push through and move on upwards – though it’s important to note that past performance is not necessarily an accurate indicator of future results.
‘Time in the market’ (how long you invest for) will always be the most important factor, rather than when you invest.
Any short-term volatility can even be of benefit to investors as it will create opportunities in the market to buy assets at cheap prices. This is something that the Investment Team at Wealthify continue to monitor as we strive for the best outcome for your Plans.
With investing your capital is at risk, the value of your investments can go down as well as up, and you could get back less than invested.
Past performance is not a reliable indicator of future results.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
References
- Data from Bloomberg
