What the 2024 UK and US elections could mean for your finances
On 22 May, Rishi Sunak stood in the pouring rain outside 10 Downing Street to announce that a UK general election will take place on 4 July this year.
This was a surprise move from the prime minister as previously, an autumn election had been thought more likely.
While opinion polls suggest the potential for a record Labour win, nothing is guaranteed until the votes are counted.
What’s more, by the end of 2024, a record number of elections will have taken place, involving more than 2 billion voters across 64 countries. This includes the US, where a presidential election is scheduled for 5 November.
Indeed, an election year often brings a certain level of political, social, and financial uncertainty. Read on to discover how a potential change of UK government and the looming US election could affect your finances.
How a potential change of government could affect your money
The UK has endured a long period of economic uncertainty and higher inflation following the coronavirus pandemic. Fortunately, the markets have begun to show signs of recovery in recent months and inflation is gradually falling.
According to figures published by FTAdviser in May, inflation hit the government’s target rate of 2% for the first time in three years. This is a mercifully far cry from the 11.1% high it reached in October 2022.
What’s more, BBC News has reported that the UK has officially exited recession after the economy grew by 0.6% between January and March – the fastest rate of growth for two years.
So, just as the economic outlook in the UK appears to be improving, the unexpected announcement of an early election might have left you feeling uncertain about what this could mean for your finances.
Of course, until the votes have been counted on 4 July, this is hard to predict
Keir Starmer’s manifesto for the Labour Party focuses on plans to boost economic growth, funded by measures such as adding VAT to private school fees and clamping down on those who are underpaying tax.
Whereas Rishi Sunak’s Conservative Party manifesto pledges to offer tax help for self-employed people and reintroduce Help to Buy schemes for first-time buyers.
While the two leading parties are likely to bring in different changes if they come into power, regardless of who wins, an election can create ripples in the economy. However, history provides ample encouragement that any volatility and uncertainty in the economy may be short-lived.
Markets may underperform in the run-up to an election, but they often bounce back
The outcome of an election can dictate domestic and international policy, which helps to shape the economic landscape. So, it’s not surprising that elections can influence short-term market performance.
While historical data from US and UK elections suggests that investments may underperform in an election year, they often bounce back once the votes have been counted.
Helpfully, US Bank has reviewed market performance during past US elections by analysing the S&P 500 – a stock market index that provides a measure of how well the stock market is performing overall.
The data showed that while investments typically delivered lower returns in the year leading up to an election, market performance tended to be stronger than usual after the outcome had been announced – regardless of who won.
What’s more, the level of influence an election has on the markets may depend on how certain the outcome is.
Research by Schroders has revealed that, in the final six weeks of the UK general election campaigns between 1987 and 2015, the FTSE 100 rose on three occasions. This included Labour’s wins in 1997 and 2001 and a Conservative victory in 1987 – all of which were regarded as fairly certain outcomes.
In contrast, the FTSE 100 fell on four occasions when the election was considered to be a close affair. For example, the FTSE 100 fell more than 8% in the run-up to the 2010 election which was such a close race that it resulted in a hung parliament and the formation of a coalition government.
The table below shows how the FTSE 100 performed 6 weeks before UK elections held between 1987 and 2015.
Source: Schroders
Of course, past market performance is no guarantee of future performance. However, this data suggests that whatever influence the elections may have on your investments, holding your nerve and sticking to your long-term financial plan could be a good idea.
Tuning out the election “noise” and focusing on your long-term financial goals could be beneficial
A certain degree of uncertainty and market volatility may be inevitable during an election year. However, as the data above shows, any downturn that occurs is unlikely to last forever.
Indeed, a general election is just one factor that can contribute to market fluctuations. Wars, technological changes, and concerns over inflation or deflation can also affect investor confidence.
Tuning out the election “noise” and focusing on your long-term financial plan could help you continue progressing towards your goals.
For example, if you panic about a dip in the value of your investments and sell your shares, you could miss out on potential future returns. Whereas, holding your nerve and investing for the long term could allow you to benefit from the powerful effect of compounding returns, which could reduce the risk that you’ll lose money.
A recent review of market performance by Schroders offers reassuring figures on long-term investing.
Analysis of 148 years of data on the S&P 500 revealed that if you invested for a month, you would have lost money around 40% of the time, factoring in inflation. Whereas if you remained invested for five years, that figure falls to 20%, and at 20 years, it’s negligible.
By remaining disciplined and following your long-term plan, you could also avoid emotion-based decisions when faced with short-term volatility.
However, this may be easier said than done during periods of uncertainty, such as during the run-up to an election. So, working with a financial planner, who can act as an objective sounding board and support you to make logical decisions based on data, could be invaluable.
Get in touch
It’s natural to feel a degree of uncertainty about your financial future during an election year. As always, if you have any queries please speak to your usual Dodd Wealthcare contact or email us at info@doddwealthcare.co.uk.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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