What the Election Could Mean for the Markets

With the election only two weeks away, we could see a new party in power. Or the LNP and Scott Morrison could remain.

Now, we’re sure you’re already sick of the election advertisement that’s been playing across your TV screens for close to a month now, and we don’t blame you.

It feels like the election campaign has been going on for months, really since Former PM Malcolm Turnbull was toppled and we had a leadership change…again.

So now it’s Morrison versus Labor Leader Bill Shorten.

So, could an election potentially affect your market investments?

While markets don’t like uncertainty, in the past the All Ords have performed relatively well in the lead up to and on Election Day.

But prior performance will unlikely ease investors’ minds coming up to the election.

With the economy currently in decline, and inflation at 0%, it stands to reason that investors in the share market are starting to feel the jitters.

With the Coalition and ALP going head-to-head in two weeks’ time, there is massive potential for economic change.

With change comes the decision from both business, household and investors to halt their spending until after these changes become clearer.

Markets will also try and predict these changes to economy and potential government consequences.

Markets past performance

The Morrison versus Shorten leadership debate on Monday night highlighted the taxation and investment implications of both major parties, which could in turn impact many already listed companies and therefore investors.

But as we’ve stated above, if you look at past performance prior to an election, you can see that our market has responded well. Take a look for yourself in the graph below:

Table showing percentage change on the All Ordinaries index March 1983 to July 2016
Source: Lincoln Indicators

If you look at the above figures, you can see that positive results outweigh the negative ones quite significantly. Eight of 26 times has there been a downturn in the All Ords, or 31%. And even when the market fell in the five weeks up to the 2016 election, it rebounded within three months.

The 2013 election, which saw the Coalition oust the ALP from government, was the last time the market experienced a downturn three months after the election.

As the Australian Financial Review (AFR) pointed out, following leadership changes, the markets have all fallen in the months after these changes: Howard/Costello 1996, Rudd/Swan 2007, Abbott/Hockey 2013.

To put minds at ease even further, only twice since 1983 has there been a downturn both prior to and after an election: in 1990 which saw the ALP retain government and in 2007 when Kevin Rudd ousted John Howard for the prime ministership.

The 1990 downturn isn’t all that surprising, as Paul Keating put it, it was ‘the recession we had to have’. And 2007 was just prior to the GFC.

Only during times of significant economic reform has the market had negative results around an election.

So what does this mean for this election?

Well, time will tell. However, since this time last year, the market has responded pretty well even when there have been talks of a slowdown in the economy.

Furthermore, while there has been a lot of negative discussion regarding Labor coming into office, since the election campaign began, markets continue to remain positive.

While we don’t know who’ll win the election in two weeks’ time, we do know that the markets are up, yet nearly all economic sectors are down: house prices, retail and residential building construction. Add on top of that, the fact that inflation was at 0% for the March quarter and wages remain stagnant while household expenses continue to rise, and with some expecting that the RBA will lower interest rates this year, well, the economy has enough to contend with.

Personally, we don’t think the outcome of the election will shift things too dramatically, with the notion of a recession very much on the cards in our opinion no matter who is in government.

The key is to always keep an eye on the markets as well as what the economy is doing to try and curb any potential financial losses.

The election might not have an effect on the markets, but there are many other factors out there that could, so always remain vigilant.

Kind regards,

Alana Sumic,
Editor, Markets & Money

We believe Markets & Money is unlike any other finance newsletter. Our mission is to look at the world of investments and finance in a sceptical and contrarian way. Our editorial team looks beyond the headlines and obvious explanations to bring you what we think is really moving the market. More importantly, we’re trying to show you where the next big opportunities and  big risks could be that you might not be aware of. In Markets & Money, you’ll read about the state of the Australian housing market, the future of the commodity boom, China’s rise to an economic superpower, the fate of the US dollar, and of course, a whole lot more.

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