How elections could influence the market and your portfolio

With more than 70 countries heading to the polls in 2024, it is set to be a year of transformation.

The UK, French, Indian, and South African elections (among others) are behind us, and there are still plenty more to come, including the US presidential elections in November.

With the potential for significant changes and shifts in the global order, a degree of uncertainty is only normal. But how do elections, their results, and the uncertainty they create affect your finances?

Read on to discover how elections could influence the market and your portfolio.

There is a correlation between uncertain electoral outcomes and market underperformance

There is a lot at stake in an election, and the outcome can mark a shift in economic, social, and international policies.

When the result hangs in the balance, it creates a sense of unpredictability, which is often mirrored by market volatility.

The table below shows the findings from research conducted by Schroders on the influence that the build-up to a series of UK elections had on the performance of the FTSE 100.

Source: Schroders

They found that in the six-week build-up to the seven UK general elections held between 1987 and 2015, the FTSE 100 rose on three occasions and fell on four.

It experienced gains leading up to the Conservative victory in 1987 and the Labour Party wins in 1997 and 2001. Each of these outcomes was widely anticipated by pollsters, media pundits, and the public, reducing uncertainty and resulting in a more stable market reaction.

In 1992, 2005, 2010, and 2015, on the other hand, polling was significantly tighter and the outcomes more uncertain, leading the FTSE 100 to fall during the campaigns in each of these years.

Undoubtedly, innumerable factors influence the performance of the FTSE 100, but the evidence suggests there is a strong correlation between the certainty of an election outcome and market performance.

This points to the value of having a diversified portfolio. While market dips are unlikely to last, a portfolio diversified across regions – as well as sectors and asset classes – helps ensure your holdings are protected against volatility, such as that caused by an election.

Market volatility caused by an election is unlikely to last

Markets are sensitive to uncertainty, and ambiguity can sway investor sentiment, leading to fluctuations. However, as with other major global or national events, election-induced volatility is typically unlikely to last.

For example, the 2016 US presidential election, bitterly contested by Hillary Clinton and Donald Trump, was remarkably tight. Global markets became increasingly volatile as the polls narrowed and the future of America felt uncertain.

Yet, though Trump clinched a startling victory, the markets quickly calmed once the result was clear. On the day following the election, the Guardian reported that the Dow Jones, the S&P 500, and the Nasdaq all posted gains.

Indeed, CNN reports that in 20 of the 24 US election years between 1928 and 2020, a moderate-risk portfolio with 60% stocks and 40% bonds would have yielded positive returns, as you can see in the graph below.

Source: CNN

The four years in which returns would have been negative were amid the Great Depression, the second world war, the dot-com bubble burst, and the 2008 financial crisis. That is to say, there were wider, macro events that would have had more of an effect on your portfolio than an election.

So, even if there is significant volatility in the run-up to an election, markets have historically been quick to steady once the outcome is clear.

Following a long-term plan and ignoring election “noise” could help weather short-term volatility

Elections are just one of multiple variables that can influence market performance and investor sentiment.

The “noise” of an electoral campaign is no different from the noise caused by any other event, and it is wise to proceed with caution if you’re thinking about making investment decisions based on the latest fad.

Attempting to time the market to capitalise on a predicted reaction to an election is fraught with risk, particularly as no outcome is certain.

For example, during the Brexit referendum, most polls had “remain” as the most likely outcome. When the “leave” vote was cemented, UK, US, European, and other global markets all posted significant losses the next day. Although the markets bounced back, many investors who tried to time their entry or exit based on the outcome of the vote suffered significant losses.

Experienced investors recognise that market fluctuations are normal and that ignoring the hype is usually a good idea. Indeed, for your financial plan to be successful, it usually requires that you take a long-term approach and maintain discipline in the face of short-term volatility.

Historically, markets have trended toward growth in the long term even in the wake of significant global events that have shaken investor confidence.

The graph below shows how $1 would have grown in the global equity market between 1970 and 2019 alongside several significant historical events.

Source: harvest

As you can see, the historical trend suggests that maintaining your investments during dips tends to be a good strategy for capturing long-term returns.

A financial plan built around your personal goals and circumstances that you stick to, regardless of the latest noise, is typically the most effective way to secure stability and achieve your objectives.

Moreover, by diversifying your portfolio and investing in assets with strong underlying fundamentals, regularly reviewed by experts, you can effectively mitigate risks and optimise long-term returns. This strategic approach enhances stability and resilience against market volatility, ensuring your investments align with your financial goals and risk tolerance.

Get in touch

While volatility is normal, particularly during periods of uncertainty, we also recognise you may feel concerned if there is a dip in the market.

To find out more about the value of taking a long-term approach to investing and why it’s usually wise to maintain your holdings amid market fluctuations, get in touch.

Email Info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.