Are general elections good or bad for the stock market?

Theresa May’s snap general election shocked the stock market when it was announced on April 18. The news sent sterling to its highest level in 2017, resulting in a downwards turn for the FTSE 100, which fell 2.5 per cent by the end of the day.

However, that jolt had more to do with a rise in sterling than anything else. In fact, newly published analysis by Schroders has found that when elections are as clear-cut as the one due to take place on 8 June seems to be, the stock market tends to perform well.

Looking back at the final six weeks of the last seven general elections, a clear trend emerges. The FTSE 100 rose when the outcome felt certain – such as in the run-up to the elections in 1987, 1997 and 2001 – and retreated when the battle was less of a foregone conclusion. The election leading up to the Coalition government in 2010 saw the FTSE 100 fall by more than 8 per cent, for example.

Click the table below for a larger version.

‘It makes sense that markets perform well during times of political stability,’ said James Rainbow, co-head of UK intermediary business at Schroders. ‘It’s useful to know that this has also applied during the run-up to elections over the past 30 years, although there’s no guarantee that will be the case for this election.’

- What the snap general election could mean for the UK economy and mid caps

Investors who make investing decisions based on election predictions and stock market activity leading up to the election may get a rude shock come election day – particularly in this current era of political surprises.

In 2015, the market reacted to the belief that it would be the closest general election in history, resulting in a hung parliament. However polls were proven completely wrong, with the Conservatives winning an outright majority.

Rainbow said: ‘During previous periods, investors may have moved money elsewhere, maybe into cash. Bonds, which have lower volatility than equities, can also prove popular at times of uncertainty. But long-term investors in the stock market should be well used to the idea that they’ll be periods which are a little rocky, especially around political major events.

‘The best option is to remember your original reasons for investment and stick to the plan.’

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