The history of previous campaigns suggests: not much. My table shows the performance of the FTSE 100 during the six campaigns (from dissolution of parliament to election day) we've had since the index began in 1984. It shows that, on average, volatility during the campaigns is actually lower than it is normally; this is true whether we measure volatility by the standard deviation of returns or by the average daily price change. Yes, average returns are worse, but only because of the index's 9 per cent drop during the 2010 campaign.
| FTSE 100 during election campaigns | |||
| % change | Annualized volatility | Av. daily change* | |
| 1987 | 4.0 | 15.3 | 0.79 |
| 1992 | -3.4 | 12.7 | 0.65 |
| 1997 | 2.6 | 11.7 | 0.57 |
| 2001 | 1.1 | 19.6 | 0.85 |
| 2005 | -0.8 | 10.6 | 0.51 |
| 2010 | -9.0 | 18.1 | 0.98 |
| Average | -0.9 | 14.7 | 0.73 |
| Post-1987 average | 0.4 | 18.0 | 0.76 |
| * ignoring sign | |||
However, this historic record might not be terribly informative. During most of them, the result was a foregone conclusion. Only the 1992 and 2010 results were really uncertain. The fact that the FTSE 100 fell during both campaigns might therefore tell us that electoral uncertainty is bad for shares: on both occasions, the 100 index fell by more than the S&P 500, so the drops weren't (entirely) due to global factors.
What's more, there's other evidence that political uncertainty is bad for shares. Scott Baker and Nick Bloom at Stanford University and Steven Davis at the University of Chicago have compiled an index of UK policy uncertainty. And it is closely correlated with equities: on average, a one standard deviation increase in their measure of uncertainty is associated with 8 per cent lower prices.
One reason for this is that uncertainty doesn't just affect sentiment. It can damage the real economy. This is because companies' potential investment projects are sometimes like call options: firms have a choice of exercising them now or later. Just as price volatility inclines you to hold financial options rather than exercise them, so economic uncertainty can cause firms to hold onto their investment options rather than exercise them. In this way, increased uncertainty can depress capital spending - which means lower economic activity and dividends.
And electoral uncertainty does mean economic uncertainty, in at least two different ways.
One is about relations with the EU: a Conservative-dominated government would have a referendum on membership, but a Labour-dominated one wouldn't. To the extent that this might generate uncertainty about trade barriers with the EU, it could deter exporters from investing.
The other is the mix of fiscal and monetary policy. Labour wants to remove only the current deficit - which means it will borrow to invest - whereas the Conservatives want to clear the whole deficit. Because a looser fiscal policy means incipiently higher aggregate demand and a lower output gap, it also means - for a given inflation target - a tighter monetary policy. This could be bad for highly-geared firms to the extent that they don't benefit from the looser fiscal policy.
However, we mustn't exaggerate these uncertainties. Neither party can pursue grossly anti-business policies (even if they wanted to, which they don't) simply because to do so would cause firms to shift their headquarters overseas. Globalisation, then, limits uncertainty.
Maybe, then, electoral uncertainty might be mildly bad for equities. But not so much so that the FTSE 100 wouldn't rise if global equities generally do well.
