Federal elections: Impact on the sharemarket

In the 11 elections held since 1990, the All Ordinaries Index climbed by an average of 1.2 per cent in the 15 trading days after poll date. In fact, the All Ordinaries Index has risen in the 15 trading days following every one of the eight federal elections held since 1998.

In the 15 trading days after federal election poll dates, the Aussie dollar, on average, rose by 1.3 per cent. In eight of the 11 federal elections held since 1990 the Aussie rose in the 15 trading days after poll date.

Background:

• We have taken a look in the rear-view mirror and analysed the impact that every federal election since 1990 has had on the sharemarket (All Ordinaries Index) and the Aussie dollar.
• Since 1990, Australia has held 11 federal elections. Out of those 11 elections, the Australian Labor Party (ALP) won four elections: 1990, 1993, 2007 and 2010. The Coalition Liberal National Party (LNP) won the remaining seven elections: 1996, 1998, 2001, 2004, 2013, 2016 and 2019.

The Impact on the sharemarket:

• In the 11 federal elections since 1990, the All Ordinaries index added, on average, 0.5 per cent in the 15 days leading up to the election. And in the 15 days after the election, the All Ordinaries Index climbed by an average of 1.2 per cent.
• In fact, the All Ordinaries Index has risen in the 15 days following every election since 1998.
• In federal elections won by the ALP, the All Ordinaries index fell by an average of 0.4 per cent in the 15 days prior to the election, and climbed by an average of 0.6 per cent in the 15 days after the election.
• But in federal elections won by the Coalition, the All Ordinaries Index averaged a 1 per cent rally in the 15 days leading up to the election, and averaged a 1.5 per cent climb in the 15 days after the election.

A deeper dive:

• In elections held since 1990, on the trading day after the poll date, on average, the All Ordinaries Index ticked 0.3 per cent higher. When the LNP won, the index delivered a 0.5 per cent increase, but when Labor won, the index finished flat on average.
• And again in federal elections held since 1990, on the day before the poll date, on average, the All Ordinaries Index retreated by 0.1 per cent.  But on the day before a LNP-winning election, the index rose by, on average, 0.1 per cent. On the day before a federal election that Labor won, the index fell by an average of 0.3 per cent.
• For the past three elections, the daily movement on the trading day immediately before and immediately after the election was positive.
• In elections held since 1990, on average in the week after poll date, the All Ordinaries Index edged up by 0.1 per cent. In the week that followed a Coalition-winning election, the All Ordinaries Index was flat on average. But in the week that followed a federal election that Labor won, the All Ordinaries index delivered a 0.2 per cent increase.
• When looking at the week before poll date, the All Ordinaries index climbed by an average of 0.5 per cent. However, the All Ordinaries index added 0.8 per cent in the week prior to a LNP-winning election, and fell by an average of 0.1 per cent in the week leading into a Labor-winning election.

• Out of 11 elections held since 1990, the All Ordinaries Index performed a ‘U-shaped recovery’ four times. These include elections in 2007, 2010, 2016 and 2019.
• And in nine of the 11 federal elections held since 1990, the All Ordinaries Index rallied in the 15 trading days after the election. These include elections in 1993, 1998, 2001, 2004, 2007, 2010, 2013, 2016 and 2019. On average during these federal elections, the All Ordinaries Index returned 2.3 per cent in the 15 days that followed the poll date.
• The four strongest post-election rallies happened in the 15 days following the 2016, 2010, 2013 and 2007federal elections, when the All Ordinaries Index climbed by 4.6 per cent, 3.1 per cent, 3.1 per cent and 2.6 per cent, respectively.
• The four greatest declines in the 15 days leading to the federal elections happened in 2007, 2016, 2010 and 2019, when the All Ordinaries index fell by 5 per cent, 2 per cent, 1 per cent and 0.2 per cent, respectively.
• Surprisingly, the sharemarket movement during elections in 2007, 2010 and 2016 were amongst the four greatest pre-election declines as well as the strongest four post-election rallies since 1990.

Federal elections & the Aussie Dollar

• Notably, the Aussie dollar has strengthened on both the day and week that followed every election since 2013.
• The Aussie dollar has also risen in the week that followed every election since 1990, with 2004 being the only exception.
• Since 1990, on the day after poll date, the Aussie dollar on average weakened by 0.1 per cent. When the LNP won, the Aussie dollar strengthened by an average of 0.1 per cent, while when Labor won, the currency fell by an average of 0.6 per cent.
• The day before poll date, the Aussie dollar appreciated by an average of 0.2 per cent. And the average appreciation was the same for a Coalition-winning election and a Labor-winning election.
• During the week after poll date, the Aussie dollar strengthened on average, by 0.9 per cent. The currency rose by 1 per cent in the week following an election that the LNP won, and rose by 0.8 per cent in the week that followed an election that Labor won.
• In the week before poll date, the Aussie dollar appreciated on average by 0.4 per cent. In the week prior to an election that the LNP won, the currency strengthened by 0.9 per cent. But in the week leading up to an election that the Labor party won, the Aussie dollar shed 0.5 per cent.
• In the 15 days after poll date, the Aussie dollar, on average, rose by 1.3 per cent. When the LNP party won the election, the currency strengthened by an average of 1.7 per cent. And when Labor won the election, in the 15 days that followed, the currency climbed by an average of 0.6 per cent.
• When looking at the 15 days leading up to poll date, the Aussie dollar rose on average by 0.1 per cent. In an election that the Coalition party won, the currency strengthened by an average of 0.8 per cent. But in the 15 days prior to an election that the ALP won, the currency weakened by 1.2 per cent on average.

So where to now?

• Clearly the background to every federal election is different. And the current federal election is occurring during a time when there is a lot of uncertainty. Global markets have been very volatile and have experienced broad-based losses in recent weeks. Since the start of the year to May 13, the S&P 500 Index has lost 15.6 per cent and recently touched a 52-week low. The Dow Jones Index has fallen by 11.4 per cent and has fallen for the past seven weeks. And the tech-heavy Nasdaq Index has tumbled by 24.5 per cent.
• The local All Ordinaries Index has shed 6.1 per cent, which although is a significant outperformance, is still a considerable drop. But why is this the case?
• This uncertainty is coming from a range of issues currently impacting the economy. Despite the Australian economy recently recording its lowest unemployment in 48 years, the annual inflation rate stands at a 21-year high.
• Inflationary pressures are coming from all sides, including staff shortages. Individuals are demanding higher wages in response to the rising cost of living and many businesses are facing both demand and supply issues as a result. Both wages growth and staff shortages are key discussion points in the current election.
• And if we look outside our borders, there are other issues lingering that can also significantly impact our local economy and the local sharemarket.
• Widespread global supply chain disruptions because of quarantine measures and Covid-19 related lockdowns have caused product delays and supply shortages, pushing inflation rates sharply higher.
• And these supply chain disruptions have worsened after Russia’s invasion of Ukraine sent fuel prices to around 8-year highs. But the impacts of the invasion have been even broader. Together, Russia and Ukraine make up 29 per cent of global wheat exports. So the war has limited the global supply of wheat, grains and other fertilisers, causing their prices to soar and driven inflation even higher.
• But complicating matters, China’s strict zero-Covid policy has softened the demand outlook for many commodities that the Australian economy is dependent on.
• Many central banks around the world have responded to higher inflation rates by lifting interest rates. Recently, the Reserve Bank (RBA) lifted its official cash rate by 25 basis points – its first rate hike in 11½ years – in an effort to tame inflation. The RBA also signaled the likelihood of more rate hikes.
• And over the past month, the Bank of England raised its key Bank rate by 25 basis points to a 13-year high of 1 per cent. The US Federal Reserve also lifted its federal funds rate by 50 basis points, the biggest lift in 22 years.
• But raising rates is a delicate balancing act, causing the economy to plunge into a recession if rates are lifted too quickly, or causing inflation to continue to soar if raised too slowly. So far, the Bank of England has warned of a possible UK recession, and global investors are wary of policy mistakes in the US.
• So even though elections may sway sharemarkets and the currency in the short term, it is important to note that it is the earnings profile of companies and the strength of the economy that play  greater roles in determining the long term performance of the sharemarket and the Aussie dollar.
• And while the election looms, so do a number of critical economic data points that investors will also pay a lot of attention to. Tomorrow, the RBA will release minutes of the May 3 Board meeting. On May 18, the wage price index will be released, and on May 19, unemployment data will be released.

Originally published by CommSec