Are stock market returns linked to the election cycle? Does it matter who is in power? Where are the opportunities? Should you act now?
This is very interesting. Partly because most of us are likely to have views skewed by personal political views, which means we lose the scent – and the facts are inconvenient. Partly because the answer is not intuitive.
Long term research* highlights that over the complete electoral cycle there is no significant difference in stock market performance between left- and right-leaning governments. This is the same in the UK and US. This is not what you might expect.
The difference, and opportunity, occurs around the time of the election itself.
If a right-wing government is elected, there might be some initial relief, and a bounce, but it doesn’t hold. Bear this in mind if the Conservatives win with a working majority, which appears to be the current favourite with the bookies.
In contrast, if a left-leaning party (Labour) is elected the market will fall sharply (ditto with a Labour-led coalition). Similarly, if there were a hung Parliament, not an inconsiderable risk. This is the opportunity.
In particular, buy smaller companies when the market falls on election of a left-wing government. The outperformance from those lows can be considerable over the whole electoral cycle – and that’s before taking into account some current peculiarities.
Right now these historical trends have the added amplifier that whomever wins is committed to considerable increases in spending, which is bound to give a boost to the domestic economy. Again, this will aid small caps, but it also highlights the opportunity in Value-style sectors and funds, which tend to be cyclical. Moreover, the Value-style has hugely underperformed over the last 10 years.
Ignoring all the other global issues, which in scale are much bigger concerns, here is my thinking:
- Labour win or Labour-led coalition. Expect prices to fall quickly, say 10-20%. Buy small caps and Value-style funds. Be brave!
- Conservative win, or they lead a coalition. Perhaps a small bounce, but don’t rush to buy. Drip in?
- Hung Parliament, and likelihood of another election within 6 months? I am still trying to get my head around that appalling prospect!
Oh and you don’t need to do anything ahead of the election - but be prepared for days following. That well and truly puts my head on the block, and creates lots of scope for me to look very silly as the New Year dawns…
P.S. do tune in to the Monthly Teleconference next Tuesday, with more specific fund ideas to exploit the above – Gold Members only.
FURTHER READING
* Is there a link between politics and stock returns? Tomasz Wisniewski, University of Leicester.