What Does it Mean to Markets?
As we approach a pivotal period in global politics, it’s crucial for our esteemed clients to understand the potential implications of the upcoming elections on the financial landscape. The Prime Minister of the United Kingdom, Rishi Sunak, has signalled that the country’s next general election will occur in the latter half of 2024. This announcement comes amidst an unprecedented wave of electoral activities, with the United States and over 50 other nations, including India and Mexico, also scheduled to hold elections. This collective polling effort will engage over 4 billion voters worldwide, marking a historic moment in democratic participation.
Understanding the Economic and Market Dynamics Around Elections
Elections play a pivotal role in shaping economic and financial market sentiments. Traditionally, incumbents may schedule elections during periods of economic prosperity to bolster their re-election prospects, occasionally adjusting fiscal policies to paint a more favourable economic picture temporarily. However, aligning election timings with economic cycles presents its challenges. For example, historical analysis reveals that a significant portion of UK elections has coincided with economic downturns, underscoring the unpredictable nature of election timing and its complex relationship with economic conditions.
Impact on Financial Markets
The interplay between elections and financial market performance is nuanced. Conventional wisdom suggests that market volatility increases in the lead-up to elections, driven by investor uncertainty, with a tendency for markets to stabilize post-election. However, empirical studies offer mixed insights. Some research indicates enhanced market returns preceding elections, while other findings suggest varying market reactions based on election outcomes, influenced by anticipated policy changes.
Notably, attempts to discern clear patterns in market behaviour around elections face challenges due to the relatively infrequent occurrence of these events and the multitude of factors influencing market dynamics. For instance, the significant market fluctuations following the 2019 UK election were attributed more to global events, such as the COVID-19 pandemic, rather than the electoral outcome itself.
Analysing Specific Market Indicators
Delving into market specifics, our analysis extends to the Vix index, often referred to as the “fear gauge,” which tracks investor sentiment and market volatility. While the index has shown fluctuations during election periods, attributing these movements solely to electoral dynamics oversimplifies the myriad factors at play, including broader economic conditions and global crises.
Our examination of the performance of major financial indices and currencies during election cycles further underscores the complexity of predicting market responses to electoral outcomes. While there are instances of increased market uncertainty and currency value shifts during election months, the subsequent market behaviour remains inconsistent, reflecting a multifaceted interplay of factors beyond electoral results.
Implications for Investors
The delicate relationship between elections and market dynamics underscores the challenges in drawing definitive conclusions about the impact of electoral outcomes on financial markets. While the short-term may witness heightened volatility and investor caution, particularly given the global scale of the upcoming elections, the long-term market direction will likely be influenced more by underlying economic fundamentals rather than temporary electoral phenomena.
In this transformative period, it is paramount for investors to remain informed and adaptable, recognizing both the opportunities and uncertainties presented by the electoral landscape. As always, our team remains dedicated to providing strategic insights and guidance to navigate these complex dynamics, with a focus on safeguarding and enhancing your financial well-being.
Written by: Lewis Sell – Independent Financial Adviser
