The US works on fixed political cycles and has done so ever since the election of the first US President, George Washington, in 1788.
This means that we can be certain that there will be a hotly contested presidential election on 5 November.
Although the UK has a more flexible approach, with the date of a general election in the power of the prime minister, the five-year term limit means there has to be a general election before the end of January 2025.
Furthermore, a BBC report in January 2024 confirmed that Rishi Sunak was working towards an election in the second half of the year, and the Independent even confirmed that he has pointedly refused to rule out an election in May.
So, in view of the importance of UK and US markets, read about what both impending elections could mean for your investments.
A dislike of uncertainty or the opportunity change can bring?
There’s an old investment saying that markets don’t like uncertainty. At a simple level you could argue there’s an element of truth in that conclusion, as uncertainty can create volatility, which can easily cause concern among investors.
It’s fair to say that elections can provide an element of uncertainty, particularly if the result is in doubt until the votes have been counted.
Even if both parties are broadly aligned in terms of their economic philosophy and fiscal outlook, there is always the potential for certain changes that could affect some market sectors.
The counterweight to that is a second well-known phrase, “change brings opportunity”, and there is evidence to suggest that markets may appreciate a new government with different faces at the helm with new ideas and polices – especially after a long period of one party being in power.
An impending UK election can be beneficial for market performance
Because there is more built-in uncertainty around the actual date of UK general elections, it’s harder to ascertain any clear pattern as to how the prospect might affect UK investment markets.
While it’s sometimes been clear that an election was imminent, such as when governments have gone into their fifth and final year such as in 1964 and 2010, there have equally been some surprises, like in 2017 for example.
According to an AJ Bell report in the Times, the average return for the FTSE All-Share Index since 1962 in the year running up to a general election has been 8.9%.
That figure compares favourably to the average All-Share Index return reported by Curvo, which over the last 20 years has been 8.4%.
Compared to this, the index has returned a more modest but still relatively healthy 6.9% on average in the year after general elections.
Who actually wins an election can have a bigger effect on markets
Who actually wins an election has proven to have a bigger effect on market values than the prospect of the election itself.
The same AJ Bell report, for example, revealed that the FTSE All-Share Index averaged just 0.9% the years after an incumbent government was returned to power. Meanwhile – in stark contrast – the figure was 12.8% when a different party was installed.
However, given there have only been six changes of power in the 60-year period covered by the data, it’s best to treat figures like this with some caution.
What can markets expect from the US election?
Because there is no uncertainty around the date of US presidential elections – with polls taking place even during the Civil War and in 1944 with US forces in Europe and the Pacific – you may be able to set more store around historical market data.
However, you need to treat such data with caution.
For example, the presidency of George W Bush began with the dot.com bubble bursting in 2001 and ended in the midst of the global financial crash in 2008. Both of these events will have a bearing on data relating to the run-up and aftermath of presidential elections, but in each case the elections themselves were not contributory factors.
Then, even when short-term turbulence can be accredited to an election, the key point is that it only has a short-lived impact.
For example, according to the Guardian, while the election of Donald Trump in 2016 did result in overnight market turbulence, markets opened the next morning in a “surprisingly calm” state.
Then in the following months, as Schroders reported, “US equities advanced and macroeconomic data largely improved”.
View investing as a long-term commitment
The key point to remember is that at times of market volatility, regardless of the cause, it’s important to resist the temptation to make short-term decisions that you may come to regret later.
Sudden fluctuations prompted by an election outcome is unlikely to affect your long-term financial security if you can tune out the inevitable overwrought media reaction and stick to your long-term investment plans.
Bear in mind that other forces, as well as elections, are likely to affect markets in the periods both leading up to polling day and immediately after.
So, trying to second-guess the performance of your portfolio based on an election can be erroneous.
Historically, markets recover from any sudden downturn to deliver in the long-term. As such, it’s generally advised that your investment timescale should be at least five years, if not longer. With a long-term investment horizon, sudden market upheaval in the period either leading up to or following an election is something you should simply be noting rather than reacting to.
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Please note
The value of your investments 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.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of ATO and HMRC legislation, which is subject to change.
