“I have been waiting to invest. I was waiting for the election results. I had thought that the stock markets would correct as FIIs (Foreign Institutional Investors) have been selling. They had built sizable, short positions on the Futures side as well but today after the exit polls, the stock markets have just taken off. The rally has been 3-5% across the board,” said Rahul, a close friend.

Elections are pivotal events in any democratic society, often accompanied by a heightened sense of uncertainty and speculation. Many investors like Rahul worry about the impact of election outcomes on the stock market, fearing significant volatility and long-term consequences. However, historical data shows that there is generally no long-term correlation between election outcomes and stock market performance. Absolutely NONE. This post aims to debunk the popular myth that elections significantly influence the stock market over the long term and provide clear examples to illustrate this point.

Elections can create short-term volatility in the stock market due to the uncertainty surrounding potential policy changes. Investors often speculate about how the policies of different candidates might affect the economy and specific industries. This speculation can lead to temporary market fluctuations as investors react to news and polls. The operating words to understand here are – INVESTORS REACT…

However, it is essential to understand that these short-term movements are typically driven by emotions and speculation rather than fundamental economic changes. Over the long term, the stock market is influenced by broader economic factors such as corporate earnings, interest rates, technological advancements, and (global) economic conditions.

Do you think the stock markets will not correct anytime now because of the election results or because of a stable government?

Or

To debunk the myth that election outcomes have a long-term impact on the stock market, let’s examine historical evidence from various election cycles in the United States.

Example 1: The Presidential Election of 2008

The 2008 presidential election took place during one of the most turbulent financial periods in recent history—the global financial crisis. Barack Obama won the election against John McCain, and many investors were concerned about the potential impact of the new administration’s policies on the already struggling economy.

Do you remember this?

I bet most don’t, but the period was an especially painful one. It felt like the global financial system was ending.

Despite the initial uncertainty, the stock market began to recover in March 2009, just a few months after Obama took office. The S&P 500, which had supposedly hit its lowest point during the crisis, embarked on one of the longest bull markets in history, lasting over a decade. The recovery and subsequent growth were driven by economic factors such as monetary policy, corporate earnings, and technological innovation, rather than the election outcome itself.

Example 2: The Presidential Election of 2016

The 2016 presidential election saw Donald Trump winning against Hillary Clinton, a result that surprised many and led to immediate market reactions. The stock markets had predicted a Clinton win and stock futures plunge as Donald Trump posted a surprising win. On election night, the futures markets experienced significant volatility, with Dow Jones Industrial Average futures dropping over 800 points at one point.

However, by the next day, the market had rebounded, and the S&P 500 continued to climb, reaching new all-time highs in the following years. The post-election market performance was driven by factors such as corporate tax cuts, deregulation, and strong economic growth, rather than the election result itself. The market’s initial reaction to the election was short-lived and did not dictate long-term performance.

Example 3: The Presidential Election of 2020

The 2020 presidential election was held amidst the COVID-19 pandemic, adding another layer of uncertainty. Joe Biden won the election against incumbent President Donald Trump. Leading up to the election, there was significant market volatility as investors weighed the potential implications of the candidates’ policies.

Despite the uncertainty, the stock market continued its upward trajectory after the election. The S&P 500 hit record highs in 2021, driven by factors such as fiscal stimulus, vaccine distribution, and the reopening of the economy. Once again, the long-term market performance was influenced by economic fundamentals rather than the election outcome.

Why Elections Have Limited Long-Term Impact

Several reasons explain why elections have limited long-term impact on the stock market:

1. Economic Fundamentals: As I have written above, stock market performance is driven by fundamental economic factors such as corporate earnings, interest rates, productivity, and technological innovation. These factors have a more significant influence on the market than election outcomes. Historical data from the 1999, 2004, and 2009 Indian elections too prove that while elections can cause short-term market fluctuations, they do not have a long-term impact on the stock market’s performance.

The 2004 general election came after a period of economic growth under the NDA government. The election, however, resulted in a surprise victory for the United Progressive Alliance (UPA), led by the Indian National Congress, with Manmohan Singh becoming the Prime Minister.

Market Reaction:

• Before the Election: The stock market was buoyant with the expectation that the NDA would be re-elected, continuing their pro-reform policies.
• Immediate Aftermath: The election results shocked the market. On the day the results were announced, the Sensex plunged by nearly 12%, marking one of its biggest single-day drops due to the unexpected victory of the Congress-led UPA.

Long-Term Performance: Despite the initial panic, the market quickly recovered. The UPA government continued with economic reforms and liberalization policies. Over the next few years, the Sensex surged, reflecting strong economic growth. By the end of 2007, the Sensex had increased more than threefold from its 2004 levels.

Fast forward just a few days ago, S&P Global Ratings raised its outlook for India to positive from stable. While revising its outlook, S&P said that regardless of the election outcome, broad continuity in economic reforms and fiscal policies were expected.

2. Policy Implementation: While elections can lead to changes in government policies, the actual implementation of these policies often takes time and may be moderated by legislative processes. As a result, the immediate impact of elections on the economy and markets is limited.

3. Market Adaptation: The stock market is highly adaptive and forward-looking. Investors quickly adjust their expectations and strategies based on new information, including election results.

4. Diversified Influence: The stock market is influenced by a wide range of factors, including global economic conditions, geopolitical events, and technological advancements. These factors often outweigh the impact of domestic elections.

For investors, the key takeaway is to stay focused on long-term goals and avoid making impulsive decisions based on election outcomes. Here are some strategies to help you maintain a long-term perspective:

1. Diversification: Diversifying your portfolio across different asset classes, sectors, and geographical regions can help reduce risk and mitigate the impact of short-term market fluctuations.

2. Seek Professional Guidance: Seeking guidance from a real financial professional can provide valuable insights and expertise. A Real Financial professional can help tailor investment strategies to your individual needs and provide guidance during uncertain times.

What Counts: Expertise and support. Leveraging professional guidance can enhance your investment strategy and provide peace of mind, knowing that your financial strategy is built on sound principles and expertise.

3. Regular Reviews: Periodically review and rebalance your portfolio to ensure it remains aligned with your investment goals and risk tolerance.

4. Avoid Emotional Decisions: Resist the urge to make investment decisions based on emotions or short-term market reactions. Just Stick to your long-term investment plan.

5. Education: Learn the fundamental truths of the stock market. Educating yourself about the factors that influence the stock market can help you make more informed decisions and stay focused on your long-term goals.

While elections can create short-term market volatility and uncertainty, they generally do not have a long-term impact on stock market performance. Historical evidence shows that the market’s long-term trajectory is driven by fundamental economic factors rather than election outcomes. By staying focused on long-term goals, diversifying your portfolio, and making informed decisions based on your own needs and fundamentals, you can invest with confidence, regardless of election results.

Ultimately, successful investing requires a disciplined approach and a long-term perspective. By understanding what truly counts in investing and avoiding the distractions of short-term political events, you can build a robust investment strategy that stands the test of time.