What can general elections mean for markets?

What can general elections mean for markets?


Gareth Trainor

4th May 2015 at 1:16pm

With the UK general election nearly here, everything I read in the press and online media seems to revolve around it. Reports on the parties, speculation on who’ll win, discussions of possible coalitions – and discussion of what could happen to the markets under various scenarios.

It’s common wisdom that financial markets hate uncertainty, and uncertainty is the one thing elections are almost guaranteed to bring – and that’s especially true for this one. So we might assume that elections are bad for financial markets. But is there really any link?

What returns have we seen?

There have been six elections in the last 30 years – in 1987, 1992, 1997, 2001, 2005 and 2010. So what has the stock market done over that time period – and in particular, have elections really had any effect?

stock market performance graph

Source: Morningstar 31st December 1983 – 30th April 2015. Based on index value – dividends are excluded.

When I look at the chart, three things immediately strike me:

  • In the long term, most elections have had surprisingly little impact. At most they just look like blips in wider market trends
  • Their effect is much lower than the effects of the other, really big events that we can’t predict. Black Monday, 9/11, the collapse of Northern Rock – these are the big events that really shock the markets
  • Most people are investing in ISAs or pensions over five, ten or more years. And the impact of the election itself seems to be irrelevant to the prevailing trend.

So whether the election has some impact on your investments or not, it’s more important to remember the big picture, and think long term.

What happens in an election year?

In the longer term, the election itself doesn’t seem to matter much. But what about the shorter term? I’ve looked at what happened to the FTSE All-share before and after the elections in the last 30 years.

Election Date

Calendar year to election

Calendar year after election

Full calendar year





























Source: Financial Express total return with dividends reinvested. 31st December 1986 -31st December 2010.

There’s a real mix of results. Looking at the table, it’s important to note that elections happened on different dates every year. Since results are calculated from the start of the year, that means that the time periods in the first two columns are different each time. Still, we can see that in the months before an election the FTSE has given a positive result three times and a negative result three. In the years when the FTSE has fallen in the months before an election, the amounts are mainly fairly minimal. Overall, there’s an average increase of 7.3%.

Meanwhile, the results after the election are much more variable. But the average return is about the same, at 6.2%. Given the vast number of things that affect the market, it’s hard to see that difference as significant – for example we see a year where the market fell by 21% in the six months following the election. But digging down a little deeper we see that year coincides with Black Monday, when stock markets crashed around the world – highly unlikely to be a consequence of an election in the UK!

Overall, our analysis shows that the FTSE has increased by an average of 12.6% in election years. That’s marginally higher than the 10.6% that it’s gone up by in non-election years*.

But don’t expect it all to go smoothly…

So an election probably doesn’t have the kind of effect on the market that should have you either rushing to move your ISA from stocks and shares and throwing it into cash, or frantically investing everything you So whether the election has some impact on your investments or not, it’s more important to remember the big picture, and think long term.can lay your hands on. Roughly speaking, you can expect much the same in an election year as you can any other year (and when it comes to investing, the general rule is to expect surprises). But what about the ride in the shorter term?

Research suggests that volatility in the UK is higher, on average, after an election. So although things might even out in the end, it could be a bumpier ride. And again, there are no guarantees. Although some election years show high volatility, some don’t – in fact the last election years gave us a dip in volatility compared to the years before and after it.

Remember the last election?

Do you remember the last election? I do – and the predictions of doom and gloom if there was no clear winner. But although there might have been some turbulence in the short term, it wasn’t a defining influence on most people’s portfolios. Looking back over the five years that have passed since then, most people would cite other factors – QE, interest rate predictions, the Eurozone – as the things that have made a significant difference.

As ever, past performance isn’t a guide to the future, and that applies now as much as to any other month or year in the markets. Each election is completely different, and who knows – maybe this will be the election that bucks the trend.

Certainly, we’re seeing differences between this election and most of the other ones in recent years. Like many others, I’ll be watching eagerly to see who our new government will be.

* Source: Financial Express total return with dividends reinvested. 31st December 1986 -31st December 2010.

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