It is tough to pick the resulting market outcome from any election, writes Cherry Reynard
2024’s calendar of elections kicked off with the Taiwanese election, which immediately careered into controversy. Yet markets appear to be untroubled by any potential escalation in geopolitical tensions it may bring about. Is this a sign of things to come, where markets largely ignore the outcomes in the busiest year for elections in history?
The Taiwanese election demonstrated some of the potential pitfalls for the year ahead, as China condemned global governments for welcoming the pro-independence victor from the Democratic Progressive party. A US State Department spokesperson congratulated the Taiwanese for “demonstrating the strength of their robust democratic system and electoral process”. This drew ire from China’s foreign ministry, which said the comments “seriously violated US promises that it would only maintain cultural, economic and other non-official ties with Taiwan”.
Markets have taken no notice of this exchange, possibly because relations between the US and China were already weak and it does not alter their position significantly. This reinforces the prevailing narrative that elections don’t matter very much for developed markets. Certainly, analysis of stockmarkets through history seems to support this view.
Dina Ting, head of global index portfolio management at Franklin Templeton ETF, says: “Data for US markets show that over the longer term, presidential election outcomes tend to have very little impact on market moves.”
Analysis from Brian Levitt, global market strategist at Invesco, shows that in the US, neither party can claim superior economic or market performance. The stock market posted positive returns across most administrations, with the rare exceptions of presidencies that ended in deep recessions. He adds that the S&P 500 index has delivered an average annual return of approximately 10% since it started in 1957 through both Democratic and Republican administrations.
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A similar picture emerges in analysis of UK markets. Research by AJ Bell of all 16 of the general elections since the inception of the FTSE All-Share in 1962 shows that the UK stock market is indifferent to a change of government – and may even welcome it: “On average, the FTSE All-Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another ushered into it. There are also greater average gains when a government changes relative to when it remains the same.”
However, it can create volatility, and this appears more likely this year than in previous election cycles.
Ting adds: “Typically, the widest range of possible market outcomes relative to other periods of the election cycle occur during the uncertain 12 months preceding election day. With current volatility in the low teens, we see the risk of politically induced spikes throughout the year. Historically, the 12 months leading up to elections post average volatility of 17% in years when the same party continues its hold on the White House; in years when the presidency flips, that figure rises to over 20%. Given the fraught political backdrop, we may see a more nervous market than what is currently priced.”
‘Ugly battle’
Anthony Willis, investment manager at Columbia Threadneedle, says there is significant potential for politics to influence markets in the year head. He sees an ‘ugly battle for democracy in the US’ adding: “We are likely to see legal processes involved and the Supreme Court will probably have a role. With the election so tight, it may make a difference. This will be a backdrop all year.”
He also believes it may affect economic outcomes for the year ahead: “Incumbent leaders are going to do all they can to stay in power, so expect governments to do what they can on the fiscal side.”
Oxford Economics is expecting major changes to tax policy in 2025 whatever happens in the election: “Republicans will rush to prevent Trump-era tax cuts from expiring at the end of the year, while Democrats will also feel an urgency to prevent a similarly timed expiration of expanded subsidies for health insurance. In a divided government, a grand bargain that permanently extends key tax priorities of both parties would add at least $1trn to deficits through 2033, and even more beyond.”
Under either party, trade policy is likely to remain protectionist, though in different ways. The Democrats may continue to favour industrial subsidies and regulation, while a Republican administration would likely turn to imposing more tariffs on the rest of the world.
In emerging markets, it is possible that a change of government may create specific investment opportunities. In Mexico, for example, there is a view that the incumbent government has not been friendly to companies looking to ‘near-shore’, meaning the country is missing out on an historic opportunity to draw in investment. The elections in June 2024 could bring in a more investment-friendly government and exploit an easy win for the Mexican economy.
See also: Should markets be pricing an economic hard landing?
Equally, elections around the world may provide an important barometer of the support for democracy. In major countries such as India and the US, democracy is wobbling. EU parliamentary elections may also see the strength of support for far right parties across Europe. It may be destabilising for markets if democracy appears to be under significant threat.
However, in all these cases, there are two problems for investors. The first is that even if they can predict the outcome for an election, and then the economic changes that are likely to stem from it, it is difficult to pick the resulting market outcome. The second is that there is not much they can do about volatility, and the right course of action is usually to stay invested.
Levitt concludes that monetary policy and innovation are likely to be far greater drivers of market returns: “Investors should be less interested in politics and more interested in private-sector business leaders who are going to harness artificial intelligence and robotics. They may be able to help cure debilitating diseases, evolve the nation’s energy sources, and develop new technologies and industries that aren’t even on the radar.”
Markets may not be as sanguine over all the election outcomes as they have been over Taiwan and there could be plenty of noise around elections in the year ahead. However, trying to predict investment returns based on an election outcome is tough and investors are likely to be better off riding out market volatility and staying invested.
