The performance of the stock market can have a huge impact on your finances – even if you don’t see yourself as an investor. Your retirement savings, or the pension you’re drawing an income from in retirement, is often invested directly in the markets.
And the announcement of a snap general election last week is an event that will have an effect on the stock markets, and the value of the savings you have invested.
Markets don’t like uncertainty, and you can expect company share prices to jump up and down as each political party sets out its vision for Britain’s future and what they plan to do should they should win the election.
But what can you do manage this volatility? Which? Money explains why an election can impact on the stock market, and what to consider for your pension, Isas and investments.
Snap election: the stock market impact
The FTSE 100 is a stock market index that measures the performance of shares in the 100 largest British companies. It contains the shares commonly held by pension and Isa funds, so it can be a useful reference for investors to see how their investments might be performing.
When the election was announced, the FTSE 100 dropped by 3%. But the fall was not dramatic.
The FTSE 100 reached a record high on 20 March this year and, while it has declined since then, the chart below shows that this dip pales in comparison to larger historic market falls, such as the eurozone crisis in 2012 or the concerns about China’s economy in January 2016.
So the election announcement may have put a slight dent in your finances, but the dip has been fairly small.
Why do stock markets react this way?
Stock markets and share prices are influenced by both internal and external events.
When companies publish their financial results and are performing well, this should have a positive effect on the share price. Conversely, if the prospects aren’t looking good, the share price can fall.
But the wider economy is also influential on share prices. If economic conditions are good and investors have confidence in companies’ ability to grow, the demand for shares increases. The more that demand outweighs supply, the higher the share price can go.
This market sentiment and investor demand for shares can increase the price.
But markets don’t like uncertainty – exactly what an election period brings. When investors are unsure about the future, particularly around how the country will be run, their confidence about the prospects of companies is affected. This is why the stock market declined when the election was announced.
Even so, in almost every general election since 1997 we haven’t seen any significant increase in volatility in the FTSE 100 in the week running up to election day or the week after. This suggests that markets continue trundling along even with the prospect of a new government and the implied changes to policy.
Does the winning party affect the stock market?
Markets tend not to favour one government over another – stock markets historically have not reacted any more positively to a Conservative government as they have to a Labour government.
Part of this is due to the ‘pricing-in’ phenomenon, whereby any risks or uncertainties are immediately taken into account in the prices of shares in UK markets.
Investors have lots of information about different parties and their policies and that’s reflected share values, so the emergence of an election winner doesn’t cause a dramatic jolt to the market – unless there’s a truly unexpected result (for example, the Brexit vote).
But markets do react to uncertainty; the May 2010 general election is a prime example of this. The FTSE 100 fell in the run-up to the election when polls suggested a hung parliament and plunged in the days immediately following, before the Conservative/Liberal Democrat coalition was announced and investors felt confident a government was being formed.
Will shares I own be affected?
Stock markets are made up of companies from a range of industries and sectors. Indeed, the FTSE 100 stock market index contains companies from more than 15 different sectors.
When different political parties are publishing their campaign manifestos, individual company shares might rise or fall as a reaction to these policy goals.
The effects, however, may be temporary, given that these are campaign promises rather than real policies being put into place by the winning government.
Five investment steps for the election period
1. Don’t time the markets
Timing the markets involves making investment decisions at the moment when you believe markets will rise to benefit from any upswing, effectively speculating on the outcome. This is a high risk strategy, and extremely difficult for private investors to do successfully.
2. Get diversified
Make sure you have a well diversified portfolio – with a mixture of assets such as shares, bonds, cash and property, and a mixture of different sectors and countries within this group of ‘assets’. This will enable you to spread risk, so if one sector or asset falls in value, others may rise to cushion your losses.
Consider taking financial advice to make sure your portfolio is well balanced for the amount of risk you’re comfortable taking – and can afford to take.
3. Keep your long-term goals in mind
You knew when you invested that you had to be prepared to weather the ups and downs. If you have a particular goal in mind with a deadline, stick to that. Don’t be distracted by the short-term noise of the markets.
4. Take advantage of investment perks
A new government will have plans to raise revenue and policies designed to help you make the most of your finances. However, it’s important to continue making use of existing investment perks, such as Isa and pensions allowances.
5. Drip feed your investments
Drip feeding your investments, perhaps on a monthly basis, can be a good way to deal with volatile markets. This is called ‘pound cost averaging’.
By investing regularly, you smooth out the highs and lows of the markets by purchasing investments when their prices have fallen, meaning you buy slightly more, benefiting when prices rise.