Election fever has hit the UK following Rishi Sunak’s announcement that the country will go to the polls on the 4th of July. So what, if anything, does this mean for investment markets?
Financial media commentators are already filling column inches and screen time encouraging investors to take pre-emptive action to position their portfolios in readiness for what might happen. But an attempt to gain an edge by predicting what will happen to the stock market after a general election is difficult.
It’s worth remembering that today’s market prices already reflect the aggregate expectations of market participants – including expectations about the outcome and impact of elections. For example, if you thought a company would perform well based on the expected outcome of the election, its share price would most likely already reflect the same sentiment shared by the rest of the market.
The good news is that if you’ve got a diversified, low-cost portfolio with an appropriate level of risk for your circumstances, you’re already well-positioned not just for the upcoming election, but the decades beyond it too.
That said, investors may also be tempted to try and predict which political party would be “better” for the stock market.
But looking back at UK stock market performance from Anthony Eden to Rishi Sunak reminds us that we needn’t worry about it. There’s no obvious pattern to suggest one party is better than the other when it comes to investment returns, but what’s clear is that the long-term growth of invested wealth persists regardless of which colour flag flies over Downing Street.
Growth of a Pound Invested in the Dimensional UK Market Index
January 1956 – December 2022
Source: Dimensional Fund Advisors
Evidently, markets don’t play politics. The market is, after all, a collection of publicly listed companies whose success or failure is influenced by much more than just the political party currently in power – economic, social and technological factors need to be considered as well, for example. But throughout political upheaval, economic crises, environmental disasters and technological overhaul, companies innovate and overcome, and the market prevails long-term.
For the next month, headlines and airtime will be dedicated to campaign trails and pre-election soundbites. But long-term investors can take comfort knowing that, whatever the result, markets will continue to be an efficient mechanism for growing wealth.
The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.
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