Wealth Management

Elections and your investments

Before the end of this year, the Prime Minister, Rishi Sunak will announce the date of the next general election. Although technically the election could happen in January 2025 expectations have been set that the election will take place in the second half of this year.

While the date and the eventual outcome may be uncertain, one thing we can count on is that plenty of opinions and predictions will be made in the coming months surrounding the vote. In financial circles, this will inevitably include discussion of the potential impact on markets. A key question however is should elections and the prevailing Government influence long-term investment decisions?

Predictions about the election outcome on the stock market focus on which party will be ’better for the market’ over the long run. The graph below shows the growth of £1 invested in the UK market over almost 70 years and 16 prime ministers (from Anthony Eden to Rishi Sunak).

19th March 2024

Growth of a pound invested in the Dimensional UK Market Index

January 1956 to December 2022

Source: Dimensional

This does not suggest an obvious pattern of long‑term stock market performance based upon which party has the majority in the House of Commons. What it shows is that over the long run, the market has provided substantial returns regardless of who lives at Number 10.

We would caution investors against making changes to a long-term plan in a bid to profit or avoid losses from changes in the political winds.

The US Presidential election

A similar picture is shown for the US. The US presidential election will be held on Tuesday 5 November 2024 and looks likely to be a rerun of the 2020 contest between Joe Biden and Donald Trump.

Growth of a dollar invested in the S&P 500 Index (1926-2022)

Source: Dimensional – the red bars represent Republican presidents and the blue bars Democratic presidents.

It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. Shareholders however are investing in companies, not a political party and companies focus on serving their customers and helping their businesses grow, regardless of who is in the White House.

Stocks have rewarded disciplined investors over the long term, through Conservative and Labour Prime Ministers as well as Democratic and Republican presidencies. Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in reliable excess returns. On the contrary, it may lead to costly mistakes. Accordingly, there is a strong case for investors to rely on a consistent approach to asset allocation—making a long-term plan and sticking to it.