The market does not like uncertainty. Therefore, it stands to reason that investors become quite nervous whenever there is a Federal election. The potential for massive changes in economic focus and their unknown outcomes will, anecdotally, see households and businesses put many spending and investment decisions on hold.
Given the significant implications, markets will try to predict the probable consequences of either a Coalition or Australian Labor Party (ALP) victory. This latest election has many battle lines drawn around the topic of investments and taxation, so the result on the 18th May has the potential to impact many of our companies and (their) investors.
However, looking at the past behaviour of the market in the lead up to, including post-election, we gain some sense as to its relevance in driving investor returns in the market.
Source: Lincoln Indicators
On average the All Ordinaries has performed well in both the lead up to and after an election result. In the 13 elections we have had since 1983, the average return of the market during the 5-week campaign leading to election day is +1.7%. After the result, history tells us that the returns can improve, with the average return of the All Ordinaries +4.7% for the 3 months post-election day. This would suggest that the stimulatory commitments made to woo voters, flow through to a more optimistic market, as businesses tend to benefit both directly and indirectly through a happier consumer.
Drilling into the numbers a little deeper, there have only been 8 out of the 26 periods (31%) where returns were negative. Most recently was prior to the last election where the market fell -2.6% over the 5 weeks prior to polling, but markets were able to rebound in the months afterwards recouping much of that lost territory.
The last time a negative period occurred post an election was when the Coalition wrested control from the ALP in 2013. Interestingly, each of the three changes in party leadership since 1983 have been followed by a negative period for the market over the short-term (Howard/Costello 1996, Rudd/Swan 2007, Abbott/Hockey 2013).
Pleasingly there have only been two periods where markets were negative both in the lead up to and after an election. 1990 the infamous “recession we had to have,” and the second 2007 which was the commencement of the GFC in 2008 were periods of great corporate and economic turmoil.
Some may point to the periods post the 1983 and 1987 elections where markets rose quite strongly following ALP election victories as an indicator for what might happen this time around, however, these were periods of significant economic reform in Australia where productivity-enhancing policies fundamentally changed the trajectory of the economy. The setting of the Wages Accord, floating of the Australian dollar, tariff removals and financial system deregulation were all designed to make our economy more competitive on a global scale. Furthermore, the floating of the previously government run Commonwealth Bank, Qantas and Commonwealth Serum Laboratories (CSL), buoyed sentiment as investors seized on the opportunity to acquire Australian iconic brand names.
Herein lies the main point of this piece; it is only during times of significant economic and corporate disconnect that it is likely the market will shift significantly during an election period. Otherwise, it is fair to assume that based on the mixed past performance, elections in and of themselves have little impact on the trajectory of the broader share market. To highlight this point further, since the election was called on 11th April at the time of writing, the market is up 2.8%. This despite all the negative talk in and around the likely ALP victory and its impact on share investors.
With no evidence to suggest that massive productivity reforms are to be implemented under the stewardship of either Party in the short-term, it is our view that bottom-up stock specific factors combined with global market related influences will govern the trajectory of our investments over the next 6 months and beyond. In a low interest rate environment with confident consumers and businesses, investors can continue to maintain their current exposure to the market appropriate to their investment objectives and stage of life – irrespective of who wins in May.
ELIO D’AMATO (@Elio_DAmato)
Elio D’Amato is the Executive Director at Lincoln indicators, a leading boutique fund manager and creator of Stock Doctor the complete share market research platform. www.lincolnindicators.com.au