After months of speculation we now know Australia’s going to the election polls on Saturday May 18, so how can we expect the market to react?
For the next five weeks, politicians will be running around the country making promises to win themselves votes and scare voters against voting for the opposition.
Yet whatever the result, a government is formed and governs for three years until it’s time for the process to repeat itself (well, unless we have yet another night of the long knives).
In other words, we have weeks of uncertainty then a period of (at least some) certainty.
After the election being called on Thursday, the ASX 200 fell 0.6 percent, but recovered in that afternoon and on midday Monday stood 0.4 percent higher than Wednesday’s close — so in the short term the market has reacted with a shrug
How can we expect the market to perform for the rest of the campaign? Star Investing has researched the performance of the ASX 200 during an election campaign and afterwards.
While there is no clear pattern that occurs during election campaigns, there is usually an upswing in the aftermath of the election once certainty is restored to the market.
|6 weeks pre-election||6 Weeks after|
|2007||-6%||0.15% (5.53% in 2.5 weeks)|
One noteworthy year was 2007, the last time a Coalition government was ejected from office and a Labor government was elected – a circumstance many expect to repeat this time.
The market fell 6 percent during that campaign.
Yet after the election was won it rose 5.5 percent in two and a half weeks (although declining after that, meaning an overall rise of just 0.15 percent over the six weeks after the election) .
Similarly in 1998, the market fell when it seemed John Howard’s tax package would be rejected at the polls. But a major relief rally ensued when he held on.
So while markets usually rise during the election campaign, they tend to fall when we see high prospects of a Labor victory.
So we should not be surprised if we go to the polls on May 18 with a share market lower than it is today, despite the early nonchalance displayed by investors so far.
But even if Labor do win, any fall will be unlikely to continue after the election campaign, unless we see radical policy changes.
On the policy front
On the subject of tax reform, both parties are promising tax cuts — although they are vastly different with the coalition’s policies targeted towards higher income earners.
On one hand, investors might be concerned about the impact on the budget bottom line of less tax revenue.
Others may think people will spend their additional income, although traditional economic theory suggesting people with higher incomes are more likely to save additional income.
So far it seems the markets are not worried about the Emissions Trading Scheme Labor have promised — although it has not been at the forefront of the campaign yet.
The bottom line?
So far the market has shrugged off the election uncertainty, but historical data shows us that this sanguine approach hasn’t always held up to and after the election.
Should policies that could make a massive impact to the economy make it to the front pages, expect to see some movement in the market.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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