The FTSE 100 has recently hit a record high above 7,500 barely three weeks ahead of a potentially momentous general election on June 8th. So where now? Can investors expect further gains or is the index set for a correction after go to the polls?  The history of the stock market before and after elections offers some clues.

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Historic returns

 

The stock market has tended to perform well in years where the result is easy to call. For instance, Margaret Thatcher’s victories in 1979, 1983 and 1987, as well as Tony Blair’s 1997 landslide, were all easy to predict and resulted in healthy gains for the FTSE.

By contrast, the stock market tends to drop when it’s too close to call – see the 8% drop in the FTSE before the 2010 election which resulted in a coalition agreement.

Looking at the six weeks before each election over the last 30 years, Schroders analysis shows a pretty good correlation between the polls and the FTSE. In 1987, Thatcher was miles ahead in the polls and the FTSE 100 rose 9.7% in the six weeks before the vote. Likewise in 1997 with a landslide for Labour widely predicted, the index rose 4.39%.

In 1992, when the Tories snuck in with a tiny majority and the polls predicted a hung parliament, the FTSE retreated by 4.9% in the six weeks prior. Similarly in 2010 everything pointed to a hung parliament and the FTSE shed 8.15%.

So far the FTSE 100 has added more than 20% in the last 12 months so is on course to exceed some of the biggest annual gains seen around elections. Markets like certainty and the belief that the Conservative party will easily increase its majority may be soothing nerves. This certainly makes the 2017 election look a lot like the 2001 and 2005 elections, when Labour coasted to victory.

However, with Labour closing the gap on the Tories in the polls there may yet be some uncertainty creep back into markets.

Post-election

 

Meanwhile, the performance ahead of the election may matter less than what happens afterwards. Here analysis by UBS Wealth Management of elections between 1970 and 2010 shows UK stocks tend to underperform global equities in the three months after an election to the tune of 3.4%.

And this year there is the added uncertainty of Brexit. Negotiations begin officially on June 19th and markets will be waiting to see what stance the new government takes. Will an enlarged Conservative majority allow Mrs May to take a harder line with the EU or will it let her be more conciliatory? Failure to increase her majority in the commons will not be taken well.

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