Many investors will think it something of a farce that the UK hasn’t had an election since 2019 yet has somehow managed to appoint three different prime ministers.
The short-lived Liz Truss administration did at least give lie to the notion that individuals can have no impact on policy through the force of their own will. But while Truss and her chancellor Kwasi Kwarteng may have inadvertently solved UK plc's persistent corporate pension deficits in one fell swoop, the turmoil unleashed on UK borrowing costs and economic stability continue to cause problems for the current administration, and probably the next. Solving this problem, as well as coping with America’s isolationist turn under either Donald Trump or (to a lesser extent) Joe Biden, will make next year's elections both interesting and uncertain for investors – which isn’t typically a situation the market likes.
In short, personalities matter, and the results of November's US presidential election and the UK general election likely to arrive at some point in 2024 will determine the direction of policy at home and geopolitics abroad for years to come.
Weighing or voting machine?
One theory that regularly crops up is how the market can 'predict' the outcome of certain events, as if thousands of individuals reaching a similar conclusion is the modern equivalent of Roman auguries reading the guts of disembowelled chickens.
The fact is that, like the rest of us, investors are in sum notoriously bad at forecasting how things will pan out. Famously, the London market was caught completely unawares by the start of the Great War. Similarly, although with less obviously horrific outcomes, the forex market was blindsided by the Leave win in the Brexit referendum, with sterling tumbling in the aftermath after it was clear that an insurgent campaign had pulled off a shock result. In other words, the information available to the market is often very wrong.
Even those who correctly call an outcome can be wrong-footed: in 2016, the consensus was that a Trump victory would prove destabilising for investors. In the event, his election sparked an equity market rally – helped by tax cuts and loose fiscal policy.
This is probably why many investors tend to hold back in advance of a big political event. IG Group looked at the seven UK general elections since 1992, and found there essentially is no pattern to how the market reacts.
What its analysts did note was that market activity, as opposed to price movements, was muted in the weeks running up to an election, before returning to normal once the result became known. The exceptions to this are situations where the result is heavily expected, as in 1997, 2001 and 2005, representing Tony Blair’s comfortable victories. Here the market continued trading at normal volumes with no real reference to the result of the election. The exception was 2010 when the uncertainty before a coalition was formed stopped the market’s momentum, which had picked up in the aftermath of the financial crash. Once it was clear who the government was going to be, the stock market rebounded.
In the UK, Labour is well ahead in the polls at the moment, which might point to an outcome like those seen around the turn of the century. But the opposition has remained relatively quiet about its positions and policies, which suggests election manifesto publication time may be the key moment for investors in politically sensitive sectors to monitor.
The state of the union
The situation in the US is broadly similar. Research by US Bank shows an interesting tendency for lower returns in the months immediately preceding a US presidential election. The study found that the S&P typically returns 8.5 per cent in any 12-month period over 90 years, but this falls in election years to 6 per cent on average. The performance of the market in the year after an election is also generally muted over 12 months; it does not seem to matter which party is in control, merely the fact that the White House is changing occupants.
Prevailing wisdom is that, given a normal run of election cycles, an incumbent is more likely to retain the office for two full terms. In fact, this is a relatively recent phenomenon. Since the second world war, only Dwight Eisenhower, Ronald Reagan, Bill Clinton, George W Bush and Barack Obama have managed two consecutive terms. If an incumbent manages to remain in place, then the immediate stock market return in the aftermath averages 6.5 per cent, while a change of parties prompts a more muted return of 5 per cent, according to US Bank.
Whether tax cuts and loose fiscal policy from a Trump administration would contradict that again this time remains to be seen, particularly as the US's fiscal position is worse than it was in 2016.
If the US market does throttle back until next November, then it must do so from a high level, given returns over the past year of 12.8 per cent. In the context of the US market's recent history, even the 6 per cent election-year average would be relatively disappointing.
