Do stock markets react to different political parties in power?

It looks as though 2024 will be the year of the next election in the UK, with the Conservative government rumoured to be looking at calling a spring general election. This has prompted many investors to look towards stock-market performance under Labour and Conservative governments and try to mould their investment strategies.

 

In this article, we will look at the figures going back to the early 1980s, when the FTSE 100 first emerged as a barometer of the top 100 UK companies. In order to put this performance into context, there are many other factors to consider.

 

Stock-market reactions to a change in government

 

When looking at the basic performance figures under different UK governments, they are probably in line with what you might expect:-

 

· Consecutive Conservative government from 11 June 1987 to 2 May 1997 - FTSE 100 up 98%

· Consecutive Labour government from 2 May 1997 to 11 May 2010 - FTSE 100 up 20%

· Conservative coalition government with the Liberal Democrats from 11 May 2010 to 8 May 2015 - FTSE 100 up 32%

· Consecutive Conservative government from 8 May 2015 to 3 December 2023 - FTSE 100 up 7%

 

It is not difficult to see a massive bias towards the Conservative Party in relation to the performance of the FTSE 100. So, do stock markets react better to a Conservative government?

 

Financial events

 

Since June 1987, when the Conservative government was re-elected, we have seen many financial shocks such as the:-

 

· 1987, Stock-market crash (Conservative government)

· 1992, Black Wednesday (Conservative government)

· 1997, Asian financial crisis (Labour government)

· 1998, Russian financial crisis (Labour government)

· 2000, Dot-com bubble bursts (Labour government)

· 2001, September 11 attacks (Labour government)

· 2007, Global financial crisis (Labour government)

· 2016, Brexit referendum (Conservative government)

· 2020, Covid pandemic (Conservative government)

 

While the Conservative Party is currently facing the cost of living crisis and various conflicts worldwide, it could be argued that the Labour Party has faced the most financial challenges since the 1980s.

 

Market reaction in general election years

 

In 2015, the Morning Star published an interesting insight into annual FTSE All-Share index returns in election years. From 1945 onwards, data shows that in the 12 months after a Conservative Party victory, the stock market increased eight out of 9 times with an average return of +10.8%. On the flipside, in the eight elections won by the Labour Party, the market only increased three times in the 12 months after taking office. The average return stood at -5.4%; however, there are two particularly influential periods to consider:-

 

· In 1974, the FTSE All Share index fell by 55% on the election of a Labour government

· in 1955, the FTSE All Share index increased by 50% on the election of a Conservative government

 

So, where does this leave us as we look to 2024 and the much-rumoured general election?

 

Sensitive sectors

 

In reality, all sectors and companies will be impacted to a certain extent when there is a change in government. This is often accompanied by a shift in taxation, regulations, and protection for employees and employers. However, there are two sectors which tend to be impacted by politics more than others:-

 

· Banks

· Utility companies

 

However, a recent Bloomberg poll suggested that two-thirds of financial professionals were backing Keir Starmer to be the next PM. The current fractional nature of the Conservative Party seems to be causing some concerns in financial markets, with the consensus switching to a preference for a Labour government.

 

Summary

 

As we have covered above, taking the figures in isolation can be dangerous and often misleading regarding stock markets and changing government. If we look at the bare bones, the Conservative Party has historically been for free markets and tax cuts, with the Labour Party often preferring increased legislation and taxation. In reality, both parties have probably started to move towards the centre with less extreme policies.

 

History also shows that the economy at the time and financial events after elections have a more significant influence on stock-market performance than politicians. However, it's essential to take the advice of your financial adviser as we approach what could be a monumental change, i.e. the next general election.

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