Sensible investors will tune out all the election noise

It’s hard to argue, this week more than most, that politics doesn’t matter to investors. The Indian stock market rose by more than 3% on Monday in anticipation of a landslide for incumbent Prime Minister Narendra Modi’s governing BJP party. Then on Tuesday it fell by 6% as it became clear that the outcome was closer than weekend polls had suggested.

The Nifty 50 index, which had trebled in value since the low point of the pandemic in March 2020, has now all but given up its gains so far in 2024. One of the most highly valued markets in the world had pinned its hopes on a third term of infrastructure spending and business-friendly reforms. The surprisingly strong showing by the Congress-led opposition could make the first quarter’s 7.8% growth harder to repeat.

In Mexico, too, Sunday’s presidential election has had a profound impact on financial markets. Shares tumbled by more than 6% after the country’s ruling Morena party secured a surprisingly strong victory that potentially paves the way for market-unfriendly constitutional reforms. Claudia Sheinbaum won a landslide that opens the door to a super-majority in Congress. And markets fear that might reduce checks and balances on the ruling coalition. Having been one of the emerging world’s strongest currencies, the peso is more than 4% down against the dollar year to date.

2024 was billed as the year of the election, with around half the world’s population having the opportunity to choose their leader this year. But until this week, investors had largely shrugged off the impact of the ballot box on their portfolios. Just four weeks before we go to the polls ourselves, it is reasonable to ask: do elections matter to the markets?

The easiest place to measure this is in the US, where the next election is less than six months away. That’s because the fixed four-yearly timetable of Presidential votes enables easier comparisons to be made. The so-called Presidential Cycle argues that markets tend to be stronger in the two years between the mid-terms and the Presidential election than in the first half of the four-year term.

That makes sense if you think that the incumbent President has the power to juice the economy in the run up to the vote, although in a country with strong institutions and an independent central bank that is questionable. There is, however, some statistical evidence to support the theory. The average stock market return in the post-election years since 1950 has been 8.3%, then 3.4% in the pre-midterm year, 14.7% in the third year of the cycle and 9.1% in the run up to the election.

Perhaps more important in the US is the relationship between the Presidential vote and the down-ballot elections in the Senate and House of Representatives. These help determine whether the first two years of the cycle are spent under a divided or unified government, and therefore how much of its proposed agenda an administration can accomplish.

It’s also far from clear that an investor can make any sensible predictions about the sector impact of one or other party winning the election. When Strategas, a markets researcher, looked at the winners and losers in all the presidential years since 1976, it found no discernible pattern, with each sector randomly out- and under-performing the wider market prior to both Democrat and Republican victories.

Overall, markets seem to care little which party the President represents. Since 1933, the average annual gains for the S&P 500 have been remarkably similar in all permutations of White House and Congress. The main takeaway seems to be that the best performance is achieved when Congress is divided. Political gridlock is probably good for the economy.

Turning to the UK, I recently crunched the numbers for all the governments since Harold Wilson’s first term in 1964. Over that 60-year period there have been seven Labour terms and nine Conservative. Both parties have seen parliaments run their full term; both have had Prime Ministers forced to go to the country early as their majorities disappeared. Both parties have occupied Downing Street during national and international crises, booms and busts, recessions and dashes for growth.

In absolute terms, the best performance by the FT All Share index was during the Wilson/Callaghan term that ended with the Winter of Discontent and the start of the Thatcher era. Between 1974 and 1979 the market rose by 260%. The second-best period was also delivered by a tired government. The John Major term from 1992 to 1997 produced a 187% return from the UK market, as the nascent dot.com bubble proved more influential than what was happening in Downing Street during the tail end of 18 Conservative years.

The third and fourth best parliaments from an investment perspective were also split between the two main parties. The second Thatcher term from 1983 to 1987 gave investors a 154% return while Tony Blair’s first term, despite straddling the dot.com bust, returned 134% between 1997 and 2001.

One thing that is often forgotten when looking at historic stock market performance is the importance of inflation. Ultimately, market returns are only worth something to an investor if they help them keep ahead of rising prices. During the whole 60-year period covered by my analysis this was only the case in six of the 16 parliaments. During the Heath government from 1970 to 1974, for example, the market rose by 24% but lost investors around 10% in real terms. The first Thatcher government saw a 61% rise in share prices but because inflation was still averaging 16% a year in the early 1980s, investors were underwater in real terms come the 1983 election.

It’s hard to avoid the conclusion that investors should tune out the political noise. They are right to concern themselves with the economic and fiscal policies of the parties vying for their votes. But when it comes to their stock market investments, they’d do better to focus on long-term financial goals. Who’s in or out of power is neither here nor there over an investing lifetime.

This article was originally published in The Telegraph.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Please be aware that past performance is not a reliable guide indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.