2024 is a bumper year of elections, with more than 60 countries heading to the polls, including the US, India, South Africa, Pakistan, Russia, and of course, the UK.
The Conversation reports that over half the world’s population is eligible to vote this year.
With so much potential change on the horizon, a level of uncertainty in the political, social, and financial realms is only normal.
So, with a handful of summer elections ahead of us, what could the run-up to the votes and their outcomes mean for your finances?
Read on to discover how the 2024 elections could affect the market and your portfolio.
Markets can underperform in the build-up to an election with an uncertain outcome
The outcome of an election can shape domestic and international policy, resulting in significant shifts in economic strategies, military priorities, and legal frameworks. So, it is perhaps unsurprising that elections can influence short-term market performance.
Research by Schroders reveals that in the seven UK general election campaigns between 1987 and 2015, the FTSE 100 rose three times and fell four times in the six-week build-up to the poll.
The three occasions it rose were the Conservative victory in 1987 and the Labour wins in 1997 and 2001. Pollsters widely anticipated each result, meaning there was reduced uncertainty regarding the outcome and a more stable market reaction.
In the build-up to the other elections, during which polling was much tighter, the FTSE 100 fell.
The table below shows how the FTSE 100 has performed in the six-week run-up to each of the seven UK elections between 1987 and 2015.
Source: Schroders
Although numerous variables influence the performance of the FTSE 100, the evidence suggests that an uncertain election result has a bearing on market performance.
Past market performance is never a reliable indicator of future performance, but with a Labour victory widely predicted in 2024, the historical trend suggests the degree of certainty in the polls could buoy the market.
Markets are driven by more than just politics, and volatility caused by uncertain election outcomes is unlikely to last
Markets are averse to uncertainty and ambiguity can influence investor sentiment, leading to fluctuations.
However, as with other significant global or national events, the volatility caused by an election is unlikely to last.
On the US market, Forbes reports that the S&P 500 performed almost 1% better on average during an election year compared to the year after. But with average respective gains of 10.67% and 11.57%, staying invested yielded double-digit returns in both cases.
In the heat of the 2016 US presidential election, global markets became volatile as the election was tight and the future under Trump – who had led an erratic campaign – felt uncertain.
Yet, despite Trump sealing an unexpected victory, the Guardian reported that on the day following the election, the Dow Jones, the S&P 500, and the Nasdaq all posted gains.
So, even in the wake of significant volatility, the market can quickly steady once a clear electoral outcome replaces uncertainty.
Focusing on a long-term plan and ignoring the “noise” of an election can be a good strategy for capturing returns
Multiple factors, such as macroeconomic performance, technology, and geopolitics, influence market performance, and the election cycle is just one variable that can lead to fluctuations.
But history shows that markets trend toward growth in the long term.
Seasoned investors understand that markets can fluctuate and that tuning out the “noise” created by an election is usually a good idea.
Following a successful financial plan requires taking a long-term approach and remaining disciplined in the face of short-term trends or volatility.
For example, Nutmeg reports that if you had invested in global stock on any single day between 1971 and 2022, you would have had a 52.4% chance of making gains.
Yet, long-term investing significantly increases your chances of yielding positive returns.
If you invested for a full quarter over the same period, your odds would rise to 65.6%. Investing for any one year would have increased your chances to 72.8%, and 10 years would have raised your odds to 94.2%.
The historical data suggests that maintaining investments during volatile periods and consistently following a financial plan is a good strategy for success. Indeed, this is one of the tenets of an evidence-based approach to investing.
Attempting to time your entry or exit from the stock market is challenging and can be high-risk, so basing your investment decisions on potential market performance during an election cycle is unlikely to be an advantageous move.
As global markets have historically trended toward growth in the long term, a financial plan built around your personal goals that you stick to regardless of short-term noise, be it election-related or otherwise, is usually a good strategy for capturing returns.
Get in touch
If you are concerned about how the elections could affect your investments and want to find out more about the value of taking a long-term approach, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.
