What will the next government’s impact be on the stock and housing market? It’s a question I get asked every election, and for a full answer, I would need the manifestos of all parties (but even then, they don’t stick to it).
We are staring down the twin barrels of large government debt interest payments and low growth forecasts. The next government will need to take more in taxes than it spends on everything else including debt interest. This hasn’t been achieved in over two decades, and with high interest rates, it makes it very tough to reduce debt relative to our national income.
Public services are barely treading water, living standards are stagnant, and taxes are at record levels for the UK (they are low to middling by European standards).
Historically, what has happened? I’ll not do what you often see – choosing specific dates to suit an argument or conclusion already decided upon. I’ve gone back to 1950 to get an idea of what has happened to both housing and stock markets in the one year after the election. Prior to 1950 the data is less relevant to today’s market. I’ve used the FTSE250 as a measure of the UK domestic market as the more international FTSE100 is a pointless comparison.
I’ll start with the conclusion that both Labour and Conservative governments have led to positive changes in the FTSE250 and housing market with Labour slightly ahead on house prices (4.4% v 3.4%) and the Tory government slightly higher on the FTSE250 (5.6% v 4.7%). That one coalition government showed lower average performances in both markets, reflecting markets’ dislike of uncertainty.
The worst changes in the FTSE250 was Harold Wilson (Lab) in 1974 with -3% and Edward Heath (Cons) -1% after the 1970 election. The best return was with Tony Blair at 28% after the 1997 election. The best Conservative return was Margaret Thatcher with 12% in 1983.
The largest change in house prices was with Tony Blair with a 10% rise, Harold MacMillan with 7% and Margaret Thatcher with 6%.
In the 18 elections since 1950 just two saw a drop in the FTSE250 in the following year, one of which was unavoidable ie: there was global turmoil.
The greater the uncertainty as you run up to the election, the more the decline due to that uncertainty, but, if I look at all six-month periods running up to the election post 1950, the worst downturn was the run up to the 1974 election where the FTSE250 fell 10% and the housing market fell 5%.
That, of course, was largely due to the oil crisis which had a 20% impact on global stock markets and created economic chaos. The next two largest falls were a 3% drop leading up to the coalition of 2010, and -2% leading up to John Major’s win in 1992. In both scenarios, the housing market fell -1% and -2% respectively.
In conclusion, we see that little happens, but when a 2% fall in the FTSE250 is recorded as ‘Over £6.5bn wiped off the stock market due to party A’s policies’, those papers sell, the market makers who make money out of volatility make money, but it’s little more than a bag of nothingness.
Currently the market believes we will be getting a Labour government and that has been evidenced for a while. The FTSE250 is up over 9% in the last six months.
The harsh reality is that these days, little divides the two leading parties in both foreign and domestic policy, and markets know that. The issue will be where votes are split by new parties, in which case expect more volatility.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query call 028 6863 2692.
