Over the long run, the stock market has provided substantial returns regardless of who lives at Number 10.
Last week’s snap election was the first national vote in the UK since the EU referendum. Although we now know the outcome of the election, the overall impact is unknown. Furthermore, there is no shortage of speculation about how the election will impact the stock market. Below, we explain why investors would be well-served avoiding the temptation to make significant changes to a long-term investment plan based upon these sorts of predictions. Trying to outguess the market is often a loser’s game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants – including expectations about the outcome and impact of elections. While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So, it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after last week’s or any future general election.
The focus of last week’s election is Britain’s exit from the EU. However, as is often the case, predictions about its effect on the stock market focus on which party will be “better for the market” over the long run. Exhibit 1 below shows the growth of £1 invested in the UK market over more than 60 years and 12 prime ministers (from Anthony Eden to Theresa May).
Exhibit 1: Growth of a Pound Invested in the Dimensional UK Market Index
January 1956–December 2016.
For illustrative purposes only. Past performance is not a guarantee of future results. Index is not available for direct investment therefore the performance does not reflect the expenses associated with the management of an actual fund. Dimensional indices use CRSP and Compustat data. See “Index Descriptions” below for descriptions of index data.
The above exhibit does not suggest an obvious pattern of long-term stock market performance based upon which party has the majority in the Commons. What it shows is that over the long-term, the market has provided substantial returns regardless of who lives at Number 10.
Equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes and the erosion of wealth.
Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in pursuit of investment returns – we call it ‘Sensible Investing’.
Dimensional UK Market Index: Compiled by Dimensional from Bloomberg securities data. Market capitalisation-weighted index of all securities in the United Kingdom. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.
Investments involve risks. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, might be worth less than their original cost.
The views and opinions expressed in this article are those of the author. Past performance is not a guarantee of future results. There is no guarantee, strategies will be successful. The information in this article is provided for background information only. It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision.