In this guide, we look at what is likely to happen to the FTSE 100 in the run-up to the 2019 General Election and what it means for your trading and investments.
Here we go again.
For the third time since 2015, UK is heading into another general election. Both houses passed the election bill last month and the polling day is now set on the 12 December 2019.
The irony is, back in 2015 the former conservative leader and prime minister, David Cameron, campaigned with the slogan:
“Britain faces a simple and inescapable choice – stability and strong Government with me, or chaos with Ed Miliband” D.Cameron 2015
Unfortunately, with hindsight that was not exactly how history turned out to be. Britain spent the last three years trying to define Brexit and will probably spend even more time in implementing it. This makes the latest GE all the more interesting.
How did markets fare prior to the polling day?
A general election is an important political event. It often defines an ‘era’. In this week’s article, I look at one aspect of this event – the performance of the FTSE 100 blue chip index in the days leading to the polling day.
For this short study, I used the last seven GEs from 1992 onwards. Of course, you can go back further, but remember that the FTSE 100 Index only came about in 1984. You would have to use other market index to measure the market performance for the seventies.
Next, I rebase the prices for each GE polling day to 100 and measure the performance backwards. Normally a GE is announced about 6-8 weeks before the actual election. This translates into about 30 trading sessions. The results are plotted below.
Prior to the GE 2010, the FTSE 100 index tended to rise in the five trading days before the polling day. Perhaps this is due to more political certainty (e.g., the three Blair landslide victories)
But in the last three GEs, the index tend to drop in the last few days before the polling. The steepest drop came from the GE 2010. Perhaps this was because the prospect of a hung parliament. Investors assume that the absence of a majority government often brings about more political uncertainty.
In GE17, Teresa May was not able to win a majority despite multiple opinion polls reported that she would, may have contributed to the index’s slide.
With these trends in mind, what should we expect in the days ahead until the 12 December?
For one, I would not expect a huge move in the FTSE 100. This index has a well-defined trading range 7,000-7,400 and is likely to range sideways until the GE.
If one reads the opinion polls now, many are saying GE19 is going to be a volatile one. In this regards, investors are more likely to stay on the sidelines until the picture clears up on the polling day.
If the index rallies in the next two weeks, expect a modest drop into the polling day. On the other hand, if it drops, a rebound into the GE may be expected.