Is a general election good news for savers and investors?

What impact could the UK general election have on the stock market? Picture: Getty Images

What impact could the UK general election have on the stock market? Picture: Getty Images - Credit: Getty Images/iStockphoto

Financial columnist Peter Sharkey looks at how the stock market changes in the midst of a general election.

My first reaction to the news that a General Election had finally been called was 'thank goodness'. It felt as though the country could, at last, take a much-needed hot shower following a long, sweaty trek along an unmarked road in temperatures exceeding 35C.

This isn't the place to come over all political (so I won't), but few would question the need for Parliament to undergo an overhaul. New, fresher faces are urgently needed, although more pressing is the requirement to elect people who are conciliatory in nature.

On the one hand, Brexit has turbo-charged political debate across the land, most of which has been healthy, rough-and-tumble stuff. Unfortunately, this has occasionally gone too far, on both sides of the debate and, like the worst family feuds, some things have been said that were probably best left un-said. These unnecessary remarks and, in many cases examples of nasty behaviour, will fester for years.

This all leaves investors in an invidious position, for no-one knows who will emerge victorious on December 12, although the worst possible outcome would be another hung Parliament.

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As for forecasts, does anyone bother consulting them anymore? At best, they're an estimate, a guess, albeit based, one hopes, on data which pollsters insist is reliable, although their recent track records leave plenty to be desired.

Stock markets tend to react negatively at first to the news that a General Election is on the way.

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Only twice since 1992 has the FTSE All Share Index risen during the period between an election being announced and the vote taking place (in 2001 under Tony Blair and in 2017 under Theresa May). For the most part, however, in seven General Elections between 1992-2017 markets either stagnated or fell, by an average of 1.4pc, immediately following the announcement of an election and voters going to the polls.

Although the period under discussion covers more than a quarter century, only seven elections were held over the period, suggesting that more data is required if we're to extract any meaningful conclusion. This view is reinforced when we consider where markets stood six months following the last seven elections.

There have been two substantial increases in the All Share Index: by 12pc under Blair in 2005 and by 10pc under Cameron / Clegg five years later. On average though, markets have risen less spectacularly, by 1.7pc, so reclaiming the 'losses' incurred during the run up to the vote.

One thing we can be certain of is that all stock markets dislike uncertainty. Perhaps this is why they tend to perform better during the run up to an election when pundits, forecasters and even the future losing side is confident about who is going to win.

Longer-term data shows that if the stock market is in decline prior to an election being called, then it is likely to continue that trend following the vote. This is particularly true if the winner is a shoo-in.

Does political persuasion play a part in stock market performance?

A study by the Stock Market Almanac shows that between 1945 and 2010, the Conservative and Labour Party won the most seats in nine general elections apiece. In eight out of the nine years the Conservatives came out on top the market rose, delivering an average annual return of 10.8pc. By contrast, the market only rose in three of the years when Labour won, while overall, the average annual return was -5.8pc.

A paper published in the Applied Financial Economics journal which examined a similar time period suggested that markets have "a clear preference for a Tory government".

But politics has changed radically, becoming much nastier and more confrontational over the last three-and-a-half years.

Dozens of politicians have already resigned before they were sacked, so perhaps the new intake of MPs will be under strict orders not to go off-piste and endeavour to fulfil their constituents' wishes. I wouldn't put a lot of money on that happening.

Can savers and investors conclude anything with certainty with a month to go before the general election? It appears certain that stock markets will experience some volatility between now and mid-December, but history shows we've got over this before and I fully expect history to repeat itself in early 2020.

TAM Asset Management Ltd offer savers the opportunity to invest in Investment ISA portfolios comprising a variety of different funds pursuing cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.

For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.

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