By Mark Atkinson, Alliance Trust
2024 is going to be a record-breaking year for democracy: more than half the world’s population – that’s over four billion people – in 76 countries, including eight of the ten most populous, are eligible to vote in a mixture of local and national elections.
Some of these elections may lead to shifts in policy, such as in the US, the UK and Europe; others are covers for broken authoritarian political systems that are unlikely to lead to much change.
Markets love to gyrate on geopolitical drama, and election years offer plenty of excuses for jitteriness amid uncertainties over the policy direction of new governments. Given the electoral super-slate for 2024, it’s likely to be an action-packed, blockbuster year.
Here, we take a look at stock market investing in election years and reveal why it’s best to ignore the noise and focus on your long-term financial goals.
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Tossing out the hyperbole
It’s a well-worn political tactic: push emotive and divisive narratives to capture the imagination of electorates and get them voting. But it can make the world seem a gloomy place. As markets absorb manifestos and election promises as well as a fair dose of hyperbole, they tend to fret over the implications for the economy and businesses, leading to swings in prices.
Under particular scrutiny will be the US given its extraordinary global influence and stock markets that represent around 70% of shares traded around the world.
With another Donald Trump presidency, at the very least, a likelihood, it begs the question: do markets do better with right or left leaning political parties?
“It’s the economy, stupid”
In developed democracies, right-leaning parties can sometimes be seen as better economic managers (perhaps forgetting Liz Truss’ brief stint at the helm). Yet, although more fiscally conservative policy lends to smaller governments and freer markets, history tells us that whichever party wins, it makes very little difference to long-term stock market returns as can be seen in figure 1, below.
Growth of a hypothetical £100 investment in the S&P 500 index
The UK follows stock. According to broker AJ Bell’s study of the impact of the past 16 general elections on the FTSE-All Share since its inception in 1962, it was found that not only are UK stock markets unafraid of general elections, they actually welcome change. As can be seen in figure 2 below, a change of government – regardless of political party – led on average to double digit percentage gains in the first year, easily beating markets following elections where incumbents were retained. It also shows a higher overall gain over the course of a fresh government’s term when compared to an incumbent’s.
Capital return from FTSE All-Share (%)
The devil is in the detail
Individual policies matter, and some sectors can get caught in the crosshairs of campaigns during election years. Given stock markets are prone to bouts of anxiety, investors can momentarily worry that sector constituents will be obliterated as a result of over-bearing government and regulation.
More than often, these worries are exaggerated: once elections are done and dusted, the fundamentals of underlying businesses tend to take over as the primary driver of stock market returns. And even if more extreme parties get into power, it is likely their policies will be moderated as bills work their way through the legislative process.
A good example is the US healthcare sector, which was initially rattled by President Barack Obama’s signature 2010 Patient Protection and Affordable Care Act, and then again as talk of reigning-in drug pricing emerged across successive elections in 2016 and 2020 – and yet, the longer term impact has been fairly minimal.
That said, there may be some nuanced implications for industry, especially if governments are favouring a more interventionist approach, as they have been here in the UK in recent years. As AJ Bell’s investment director Russ Mould points out, current conservative government policy has thrown policy curveballs at industry through sugar taxes, Help to Buy, energy price caps, windfall taxes on North Sea oil producers, 2021’s National Security and Investment Act, and proposals for changes to the 2005 Gambling Act. In recent years, a range of regulators have also been baring their teeth more in response to public opinion too.
As such, while the impact of new policy is unlikely to be radical and derail the stock market more broadly, the devil is in the detail in terms of individual investments.
Ringside seats are the worse
Pessimism is an effective tool when deployed during political campaigning – but this can lead to private investors holding back from the stock market and leaving chunks of their wealth in cash until the bell has been rung on the political boxing match.
But while sitting ringside offers a safer view of market behaviour in the face of political pugilism, it also serves to dent our long-term returns. Out of the 24 elections that have been held since the S&P 500 index began, 20 produced years with positive returns, averaging 11.5% per election year – returns you wouldn’t want to miss out on.
What’s more, while we would all love to miss those dreadful days in the market, the best days often follow or come very soon after. Even professional investors do not attempt to time these swings.
Investing in the election year
- Keep diversified: with such an extraordinary slate of elections, its best to spread your investments across global markets.
- Stock pickers welcome: the changing policy mix may have complex implications, now is the time for active portfolios.
- Remain invested: history tells us that even in volatile years, it’s best to keep your toe in the water. Remember, it’s time in the market, not timing the market.
