In July 1945, two months after Germany surrendered, Winston Churchill was in Potsdam at the first meeting of the heads of government of the UK, US and Russia to decide Europe’s future. On the 25th of July Churchill flew back to London to await the results of the general election that had been held that month – the first election for ten years. With the war-hero Churchill at their head, the Conservatives were confident of victory, although some of the more pessimistic forecasters thought their majority might be as low as 30. The following afternoon the results started coming in and it was soon obvious that Labour had won by a landslide. The final result was a Labour majority of 146 seats – the first time Labour had won a majority. The following day the FT Industrials Index promptly fell 3 points to 115.
Over the following few days the gloom continued and the index slumped to 105.9, although gold shares and dollar securities saw buying as a hedge against the coming socialist apocalypse. The Financial Times joined in the misery with an editorial describing the election as,
the most serious reverse since the dark days of 1940.
Nationalisation was the bogey word spooking the market – the phrase “public ownership” had appeared many times in the Labour party manifesto.
However, after the shock of a socialist government had sunk in, investors quite liked the idea of receiving compensation for their investments in some really rather dull industries, and which allowed them to re-invest in some new and more dynamic ventures. The Labour party manifesto itself had signalled the new opportunities,
The genius of British scientists and technicians who have produced radio-location, jet propulsion, penicillin. and the Mulberry Harbours in wartime, must be given full rein in peacetime too.
Well, perhaps not Mulberry Harbours but, yes, the future looked bright for British industry to exploit the new advances in electronics, radio and television, textiles, chemicals, plastics and pharmaceuticals.
A few months later, by the time of Chancellor Dalton’s first budget, the FT Industrials Index had recovered nearly all the ground lost since the election. The FT described the budget as a “tonic for both industry and labour”, and when in December the government announced the nationalisation of 850 coal industry entities, the market shrugged and share prices rose.
The 1945 election obviously took place at an exceptional time, but the reaction stages of the stock market are similar to those in other general election years. An example can be seen in the following chart of the market in the year 1983: the market rose before the election, sold off on the result, but ended the year higher.
There have been 18 elections since WWII, and the market has ended the year higher than it started for 12 of those elections. The following chart shows the annual return for the FTSE All-Share index in each election year since WWII.
The average return in those 17 election years (in 1974 there were two elections) was 3.0%. Hence, historical precedent would suggest that the UK market will see a positive return in 2015.
Another election to consider here might be the US presidential election in 2016: the last time the US market fell in a pre-presidential election year was in 1939, and the average return in these years has been 17%. Given the strong correlation between the US and UK markets, this could be another factor suggesting a positive return for 2015.
The above chart indicates which party won the most seats in each election year: both the Conservatives (blue) and Labour (red) have won the most seats in nine general elections since 1945. But in the nine years that the Conservatives won the most seats, the market has risen eight times with an average annual return of 10.8%; while for Labour the market only rose in three years and the average annual return was -5.8%
The following chart shows the average performance of the stock market in the months around the election itself.
On average the market has risen two months before an election, with an average return of 0.32%. But after that the returns in the following three months are all negative, with the second month after the election seeing an average return of -1.3%.
In 2015 the general election will take place on 7 May, in which case history would suggest that the following two-month period up to 7 July will see a weak market. Of course, this period will overlap with the Sell in May effect which often sees a weaker market at this time of the year anyway.
In summary, the historical precedent suggests that the market will end higher in the election year 2015 than it starts. Although such forecasts would most likely not have been supported by Winston Churchill, who said,
I always avoid prophesying beforehand, because it is much better policy to prophesy after the event has taken place.
- Reference source for the 1945 general election: George Blakey’s A History of the London Stock Market
- Article first appeared in Investment Advisor.