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Analysis

UK General Election:
Historical performance in election years

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

Financial markets in election years

Although CFD traders tend to deal in short-term market movements, understanding longer-term trends is still important for anyone active in financial markets. 2024 is a major election year all around the world, with elections in the EU, USA and UK. Traders can look to past election years to get an idea of how markets may perform, but it is important to remember, especially for more distant elections, that underlying fundamental factors have changed considerably.

 

Fair comparisons

Since 1987, there have been ten general elections in the UK. In that time, the country has changed dramatically in terms of its economy, population, age, and political situation, making it hard to draw comparisons across longer periods. For this reason, when looking at past election performance, it’s best to look as closely as possible. Current opinion polling suggests a large Labour majority. In terms of vote share, the most comparable past election is the 1997 Labour landslide, when Tony Blair swept to power after nearly twenty years of Conservative rule. In 1997, stock markets surged in the six months leading up to the election, barely moved on the following day, and performed strongly for the rest of the year. But can CFD traders expect the same pattern this time around?

 

1997: A similar election, a similar country?

The differences between 1997 and 2024 are stark. In 1997, the British economy enjoyed a multi-year run of significant growth in GDP per capita, strong productivity gains, and maintained a positive trade balance. The FTSE100 was up more than 120% from its low in the brief 1990 recession, and the UK national deficit was falling from its 1990s high, still benefitting from the long period of surplus in the 1980s. The UK formed part of the European Union, and roughly a similar number of people who left the country each year, arrived. All this allowed Blair to run on a broadly pro-business, economically liberal platform, while still raising spending on social services.

2024: Economic difficulties

Today, the UK has record levels of national debt, government spending is far higher than at any point in the 1990s, and the trade deficit is over £4 billion. Manufacturing’s share of the economy has fallen from around 15% to a little over 8%. The UK has left the European Union, and since 2019 has experienced the highest levels of immigration in its history, mostly from outside of the EU. Compared to the 1997 election, there is little room for increases in government spending and social programs that characterised Blair’s Labour. These long-term, fundamental trends are negative for markets and will produce significant challenges for the new government. Even so, some analysts believe UK stocks are undervalued, making the market impact of a Labour win unclear.

 

Long-term examples

Only one out of the six Labour election victories from 1945 to 1997 saw a positive next-day change in UK markets, compared to seven out of eight Conservative victories. If this pattern repeats, we can expect a weak performance from stock markets following the likely result, with volatility on Friday morning. Other assets, such as GBP/USD, could be more resilient since currencies are more influenced by fundamental factors such as interest rates.

If the market reacts in the ‘usual’ way to a Labour victory, ADSS traders can expect volatility in risk on assets, especially stocks and indices, but more stable debt and currency markets. The Sterling is notoriously unpredictable in election years, with widely different outcomes from election to election, but big moves are most likely in more volatile stock markets.

 

“The Pound Sterling is notoriously unpredictable in election years, with widely different outcomes from election to election.”

 

Conclusion: trading elections

Trading elections involve a lot of uncertainty. In this UK general election, the result is not really in doubt. Labour has retained a massive polling lead, and everyone expects Keir Starmer to become Prime Minister. But markets can be fickle, and no one knows how they will react. Comparing 2024 to 1997 might seem logical in terms of polling, the political circumstances behind the vote, and the likely result, but the UK today is a completely different country from when Blair came to power. The other possibility – that markets react negatively, following the long-term trend – will mean high levels of volatility after the election, and possibly a bad end to the year for UK stocks. Only time will tell, but whatever happens, CFD traders may choose to explore both long and short opportunities in UK markets.

FAQs

How do UK elections impact financial markets?

UK elections have varied effects on financial markets. Historically, Conservative victories have often led to positive next-day changes in UK markets, and a stronger stock market throughout the election year. The market reaction to Labour victories has historically been more negative. An exception is 1997, an election with some similarities to 2024. In 1997, the stock market surged leading up to the election but remained stable the day after Labour’s victory. However, the long-term trends and current economic conditions also play a significant role in market performance, and there are big differences between Britain in 1997 and today.

Can past election years reliably predict market performance in 2024?

While past election years can provide insights, they cannot reliably predict market performance. Comparing historical elections to the 2024 general election is difficult, due to significant changes in underlying economic and political conditions. For instance, the UK’s economy, trade balance, and political landscape have all shifted dramatically since 1997, making direct comparisons challenging. Traders should consider these fundamental differences when evaluating potential market reactions.

Which assets are most likely to experience volatility after the election?

Risk on assets – stocks and indices – are often volatile following an election. The stock market opens on Friday 5th July, and from the open, traders will get a good idea of the market reaction. Currency markets trade 24 hours a day, so the reaction of the GBP can be seen live as results come in. No one can say with certainty how either market will react, but looking at past elections gives some clue about potential performance this time round.


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