2024 is likely to be a record-breaking year of political change and upheaval as countries across the globe prepare for elections.
In the US, Joe Biden will go up against Donald Trump again in November. Here in the UK, Rishi Sunak says he expects to call a general election in the second half of the year.
According to Time, more voters than ever in history will head to the polls in 64 separate countries throughout 2024.
As an investor, you may be worried about how this might affect your wealth. After all, we only need to look back to the Covid-19 pandemic or the war in Ukraine to see how global events can upset markets.
Yet, before making any decisions, it’s important to consider what’s happened to markets during past elections and what the future might hold.
Read on to learn more about how a year of elections could affect your financial plan.
Uncertainty around elections often causes market volatility
It was unsurprising when Tony Blair won the general election and came to power in 1997. Experts had been predicting a Labour win for months beforehand as Blair was incredibly popular and had the support of influential media outlets, including the Sun.
As a result, this election didn’t cause markets to crash and, according to the London Stock Exchange (LSE), the FTSE 100 grew by 8.79% between 1 April 1997 (one month before the election) and 1 June 1997 (one month after the election).
Investors were comfortable in 1997 because they were fairly certain what the outcome of the election would be. However, it’s a different story during more unpredictable contests.
For instance, the general election on 6 May 2010 was the first time since 1974 that the UK had experienced a hung parliament, where no single party achieved a majority in the House of Commons.
In the lead up to the election, the Conservatives were polling well while Labour had fallen out of favour with the public. Yet, Nick Clegg’s Liberal Democrats were gaining ground, particularly after his performance in televised debates and the party’s promise to make university free.
As a result, the election was too close to call and the market reaction reflected this uncertainty. Data from the LSE shows that the FTSE 100 fell by 8.81% in the week leading up to the election.
Over the next few weeks, as the Conservatives and Liberal Democrats negotiated the formation of a coalition government, the markets continued fluctuating. The LSE reports that between election day and 1 July 2010, the FTSE 100 fell a further 8.65%.
So, elections don’t necessarily cause market volatility, but uncertainty often does. The recent market crash after Liz Truss and Kwasi Kwarteng delivered their controversial mini-budget is a prime example of this – albeit this was just a change of leadership, rather than a general election.
As such, when trying to determine whether upcoming elections are likely to affect your investments, it may be useful to consider how certain the outcome is.
It’s also important to note that the figures above describe stock market fluctuations over a very short period around elections. To get a more accurate picture of how elections influence the stock market, it’s useful to consider a longer time frame (more on this later).
Labour could be likely to win in the UK but the US election is harder to predict
The Conservative government has faced numerous crises in recent years, including the rising cost of living, skyrocketing energy prices, and several scandals about conflicts of interest or the behaviour of MPs.
As a result, public opinion of the party has shifted and, according to the Guardian, Labour has been polling ahead of the Conservatives since at least April 2022 and this lead has increased in recent months.
So, while nothing is certain and smaller parties such as Reform UK have gained some ground, a Labour victory could be likely. If the next election follows the same pattern as previous ones, the markets may be less likely to fall.
Indeed, the Times Money Mentor reports that the FTSE All-Share returned an average of 0.9% in the year after an incumbent government returned to power. Conversely, it returned 12.8% in the year after a new government was elected.
As such, past trends suggest that the election may not cause the value of local investments to fall, regardless of which party is successful at the polls.
In comparison, the US election is far less predictable. Information from the Economist shows that Biden and Trump have been polling almost equally since January 2023.
Additionally, Donald Trump is currently facing legal issues that may affect his presidential campaign between now and the November election. This makes it more difficult to predict who will win and could lead to more volatility in US markets.
Consequently, you might find that your US investments lose value while UK assets could be more stable. This is one reason why diversifying your investments could be beneficial.
It’s also important to note that the value of your investments could fluctuate in reaction to many outside factors. So, this isn’t necessarily a reason to change your investment strategy as the markets tend to correct themselves.
Market volatility around elections is usually short-lived
During an election that is too close to call or perhaps has a surprising result, the markets could go through a period of volatility, and you might find that the value of your investments falls.
Yet, this is no reason to panic and start cashing out or changing your investment strategy as that volatility is typically short-lived.
For example, we’ve already seen how the 2010 general election and the resulting hung parliament caused markets to dip in the weeks before and after polling day. However, if you take a slightly wider view, you can see that the markets quickly recovered.
According to the LSE, the FTSE 100 grew by 10.59% between 6 May 2010 (election day) and 6 May 2012.
If you had cashed out your UK investments shortly after the election, you may have turned a theoretical loss into a real one. But if you waited a few years, the markets would have corrected themselves and your investments may have continued to grow.
This is a trend we see often with significant market upsets including the Wall Street crash of 1929, the dot-com bubble, or the 2008 financial crash.
As such, you might not need to be too concerned about the potential effects that an election could have on your investments. Provided you take a long-term approach to investing and stick to your financial plan, you may be more likely to reach your goals.
Get in touch
If you are worried about upcoming elections and how they could affect your wealth, we can give you the reassurance you need.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Past performance is not a guide to future performance and should not be relied upon.
Approved by the Openwork Partnership on 12/04/2024
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