Less clear is the relationship between markets and UK general elections. Stephen Eckett has previously investigated this in his Stock Market Almanac, a wonderfully comprehensive annual summary of stock market facts and figures. Before the last general election in 2015, Stephen found that the FTSE All-Share had risen on nine of the last 11 election days, but only by 0.67 per cent; the two months before election day are quiet, and the two months after mildly weak; and, rather unsurprisingly, a Conservative victory sees an average gain of 1.9 per cent the following day, while a Labour victory means falls of the equivalent magnitude. Not a lot for investors to get their teeth into really.
This is partly explained by the irregularity with which our elections are held, in contrast to the clockwork regularity of the US system. As this week’s latest political twist highlights, UK elections can come almost out of the blue – despite the introduction of the 2011 Fixed Term Parliaments Act which aimed to fix the UK election cycle at five years – and thus do not necessarily track any broader cycle, nor indeed has any market behavioural cycle evolved around their taking place. In the US, by comparison, the predictability of election cycles means incumbent governments often pull fiscal and monetary levers, which in turn exert a fairly predictable influence on stock markets.
There was, however, an immediate market response to the announcement of a general election to be held on 8 June, and that was a dramatic strengthening of the pound and corresponding fall in the FTSE 100. I have read various, vastly contrasting interpretations of this, ranging from the idea that a stronger mandate for Theresa May will silence her most ardently Eurosceptic backbenchers and result in a softer Brexit, to the idea that a strengthened government will be able to more smoothly negotiate a harder EU exit. Some analysts suggest this could mark the start of a sustained sterling rally, and if that’s the case then the large companies index could be in for a bumpy ride in the coming months as the shine comes off of the lazy dollar-earnings narrative that has lifted it to such heady heights. Another good reason, perhaps, to soon exploit the strongest seasonal trend of all and sell in May.
