Prime Minister Rishi Sunak has called a UK general election for 4th July 2024. With just six weeks to go until polling day how will the general election impact the UK stock market? Ahead of the previous two general elections, I published research looking at the potential impact. With the benefit of hindsight, it is now an opportune moment to dust this down and update it.
Pre-election equity rally
The table below shows how the UK stock market has behaved in the six weeks ahead of every election since 1987.
| Year | Polling prediction | Winning party |
FTSE 100 gain or drop
|
| 1987 | Conservative majority | Conservative | +9.70% |
| 1992 | Hung parliament | Conservative | -4.90% |
| 1997 | Labour majority | Labour | +4.40% |
| 2001 | Labour majority | Labour | +1.40% |
| 2005 | Labour majority | Labour | -0.40% |
| 2010 | Hung parliament | Conservative coalition | -8.15% |
| 2015 | Either party could win a majority | Conservative | -0.12% |
| 2017 | Conservative majority | Conservative coalition | +2.94% |
| 2019 | Conservative majority | Conservative | +0.35% |
| Average | +0.58% |
Typically, ahead of a general election the FTSE 100 rallies 0.58%. However, based on the limited sample set it would appear that the UK stock market is more positive when a clear conservative majority is predicted, as shown in the table below. When Labour is predicted to have a clear majority (as they currently are) the market has still risen an impressive 1.8% on average. But what is most clear, is that the stock market cares more about there being a clear winner, rather than an uncertain outcome.
| Prediction | Average % FTSE 100 gain ahead of the election |
| Conservative majority | +4.39% |
| Labour majority | +1.80% |
| Hung Parliament | -6.53% |
| Either party could win a majority (2015) | -0.12% |
Post-election equity slump?
Ahead of the last election I explained how what happens in the months after an election often has little to do with the election itself. 2019 was no exception and proved further that landslide election victories don’t necessarily translate into further equity profits months down the line.
| Year | Landslide winner | Notes |
| 2015 | Conservatives | While not expected, it was an outright victory for the Conservatives. Markets immediately jumped 2% after the surprise result before fading. Ended the year over 9% down from the election date, mainly due to China induced sell-off in the summer |
| 1997 | Labour | Preceded by stock market gains and a further 15% gain in the second half of the year, after a 10%+ correction |
| 1987 | Conservatives | Preceded by stock market gains but soon followed by Black Monday and 30% sell-off |
| 2001 | Labour | Dotcom bubble implosion was underway & preceded 9/11 attacks - stock market was already in decline and continued |
| 2019 | Conservatives | The Covid pandemic struck in 2020 and the stock market collapsed in February of that year. Six months after the election day the FTSE 100 was down -16,06%. A year after the election the FTSE 100 was still down -10% but began to rally after the announcement of the discovery of a Covid vaccine. |
So even if investors get the outcome they want, having rallied in the lead-up to election day in anticipation, once the result is confirmed global macro events can quickly overwhelm and dictate the direction of stock markets.
Performance of UK stocks from 1 month before an election to 1 month afterwards
So we now know that history suggests that in the lead up to an election the UK stock market tends to perform well if the outcome is widely predicted, but over the medium term macro events dictate where it heads over the next 6-12 months. But what about across the election? The table below shows the average return for the FTSE 100 and the more domestically focused FTSE 250 from 1 month before the election day until 1 month afterwards. Typically the FTSE 250 outperforms the FTSE 100.
The 2019 election followed the usual historic pattern of the FTSE 250 (with its exposure to mid-cap companies) outperforming the large-cap FTSE 100. The 2017 election is also worth highlighting as it was a year that an unexpected outcome followed a consensus prediction ahead of the election. In this instance Theresa May was expected to secure a Conservative majority but instead ended up in a Coalition government. If in 2024 we get an unexpected result and a weak government then it's likely to be interpreted as bad news for the UK economy and therefore ultimately the FTSE 250 in the short term. Equity markets clearly prefer certainty and political stability.
How will the election affect the pound?
The value of the pound has a huge impact on UK investors' portfolio returns, especially since the 2016 Brexit vote. When the pound weakens, particularly against the dollar, it usually provides a boost to the FTSE 100 as well as overseas holdings. So how does a UK election impact the value of the pound?
Typically across an election, you can expect the pound to fall more than 1% based on history, but an unexpectedly strong election result, like in 2015 and 2019 tends to be immediately positive for the pound. The chart below shows how the pound rallied 1.6% in the 24 hours after the 2019 election result before reversing course and stabilising. Interestingly after other landslide election wins in 2001 and 1997, the pound strengthened before the rally also faded within a month.
A result that isn't in line with consensus predictions, like in 2017, is usually negative for the pound. However, the decline was short-lived with the pound recouping the losses against the dollar within 30 days of the election result.
It is worth highlighting that the post-2017 election slump in the value of the pound actually occurred within a much wider rally for sterling in 2017, as shown below, which continued until April 2018.
So investors can expect another volatile period as the pound will likely fluctuate as and when each political party lays out their manifestos. One suggestion is that a Labour win could lead to closer ties with Europe which could unwind some of the post-Brexit weakness we've seen in the pound against major currencies. But in 2024 expected changes in monetary policy are still likely to be the biggest catalyst for changes in the strength of the pound. A July election makes a June interest rate cut by the Bank of England incredibly unlikely, not that it was the market's base case scenario prior to the election date being set. It is part of the reason why we saw the pound strengthen slightly after Rishi Sunak announced a snap election.
Summary
The upshot is that we can expect an increase in volatility in equity and currency markets whatever happens on the 4th July with markets likely to react positively if we get a landslide result in line with predictions. As long term investors, history suggests that knee-jerk reactions should be avoided because market reactions, while often strong, are usually temporary ahead of macro events regaining investors' attention.
