A mixed first year of Tory government

New analysis by The Share Centre looks at the performance of the stock market in the year since the 2015 election; chief executive Richard Stone compares it to the first year in office of other governments since 1987

A mixed first year of Tory government

The stock market has been more volatile than any other post-election period since 1987. However, market movement during the past twelve months has been the lowest when compared to any other general election in the last 30 years

The outcome of a General Election and the policies of a new government can set the tone for the stock market and influence investor sentiment. Looking back on the last twelve months following David Cameron’s surprise success in May 2015 shows what investors have had to deal with. Government policy is supportive of investors and many of the measures set out by the Chancellor in his budgets are to be welcomed.

However, the data shows that 2015/16 has been an exceptional year and it is hardly surprising that investor sentiment and activity has been relatively weak. Investors have had to face into a falling market, trading in a narrow range but with high volatility, in other words high risk. With the market lacking direction but risk high, many investors have chosen to sit on the sidelines.

We hope that some of the uncertainty driving these market characteristics will lift during 2016 and investors’ confidence will return, enabling them to take advantage of the many positive steps the Government has taken to encourage them in their endeavours.

Not as turbulent as you may think

On 7 May 2015 David Cameron astounded the political pundits and won an outright Conservative majority following five years of coalition government alongside the Liberal Democrats.

This surprise result cheered investors and markets – not least due to it removing the uncertainty of expected protracted coalition discussions and because generally the Conservative party in government is seen as more sympathetic to business and wealth creation. Indeed on the day after the election (Friday 8th May) when the result was clear and as David Cameron drove to Buckingham Palace, the FTSE All Share rose 2.4%.

One year on, how has the journey been for personal investors? How does the first year compare to the first year in office of previous governments?

For many personal investors it has certainly felt like a rollercoaster. The certainty of outcome delivered by the General Election was quickly replaced by uncertainty surrounding the UK’s position in the EU, as well as growing uncertainty over the global economy, a sharp fall in the oil price, concerns over China, tensions in Syria, uncertainty as to the timing of US interest rate increases and more recently concerns over the US Presidential Election taking place later this year.

However, looking at the market data for the past year would suggest actually it’s not been as bad as personal investors may at first feel. Compared to other post-election periods, the stock market in 2015/16 has seen the greatest volatility but also the smallest spread from its high to its low.

To give a sense of historical perspective, The Share Centre has looked back at the seven General Elections which have taken place in the last 30 years and the first year after each.

Stock market performance

Year of General Election Prime Minister elected Political Party Performance of FTSE All Share in the first year
1997 Tony Blair Labour + 32%
2005 Tony Blair Labour + 28%
1992 John Major Conservative + 19%
2010 David Cameron Coalition + 14%
2015 David Cameron Conservative -8%
1987 Margaret Thatcher Conservative -11%
2001 Tony Blair Labour -17%

Based on FTSE All Share closing prices

As the table above shows, markets gave up their first day optimism and highs which had been reached during April and maintained into May 2015. Investors have seen the market lose ground in the first year of this government – a loss of c.8% depending on quite where the market closes on Friday 6th May. The average movement over the year following each of the last seven General Elections, covering 30 years, has been + 8%, and four of the last seven General Elections have seen markets rise in the following year.

That said, markets have not performed as badly as in some other cases – for example in 2001 following Tony Blair’s re-election when the markets were still falling following the bursting of the tech bubble, and markets lost 17% in the year.

Volatility

Investors do have a sense that the market has been more volatile. There is a perception that markets have experienced more dramatic moves up and down during the year than has historically been the case. For example, in August 2015 when China devalued the Renminbi the markets fell sharply, when Mario Draghi launched the European Central Bank’s ‘bazooka’, unleashing more quantitative easing, markets initially rose and then fell sharply with an intra-day movement on the German market of c.4%.

The data in this area is interesting and surprising.

Year of General Election Prime Minister elected Political Party Number of days where market moved by more than 1% (+ or -) Number of days where the market moved by more than 2% (+ or -)
2015 David Cameron Conservative 84 24
2001 Tony Blair Labour 74 19
1987 Margaret Thatcher Conservative 72 24
2010 David Cameron Coalition 69 17
1997 Tony Blair Labour 64 9
1992 John Major Conservative 45 7
2005 Tony Blair Labour 17 1

Based on FTSE All Share closing prices

The above table clearly shows that this has been a more volatile year. On 84 days the market (FTSE All Share) has moved by more than 1%, 10 days more than in any of the other years following a General Election. In fact 24 of those occasions have seen the market move by more than 2% which compares to just one such day in the year after Tony Blair’s re-election in 2005.

Looking at volatility against performance, it is also interesting to note that the three worst years following General Elections in terms of market performance were also the three most volatile in terms of the number of days the market moved by more than 1% or 2%.

However, it is not all such a negative picture in terms of volatility.

Year of General Election FTSE All Share High in following 12 months FTSE All Share Low in following 12 months Movement from high to low
1987 1,238 784 58%
2001 2,881 2,128 35%
1997 2,847 2,138 33%
1992 1,438 1,086 32%
2005 3,124 2,427 29%
2010 3,160 2,485 27%
2015 3,824 3,046 26%

Based on FTSE All Share closing prices

The above table shows that the overall market movement during the twelve months following last year’s General Election has been the lowest when compared to any other General Election in the last 30 years. In most cases the movement was around 30% from top to bottom in the year, but at 26% the past year has been lower, and substantially lower than the dramatic movements seen in 1987 when the market moved 58% from top to bottom.

Here again there is a correlation between poor performance and volatility with the two worst performing years following a General Election (1987 and 2001) also being the two years which had the biggest spreads from the market high to its low during the year.

Unusual 12 months

2015/16 therefore stands out as being an unusual twelve months after a General Election – poor performance (the market has lost c.8% in value), high volatility (most days with movement >1%), but lowest spread from its high to its low. In other words, the market has been more volatile but traded within a narrower range.

So, if personal investors have had little to cheer in terms of market performance and volatility, they have at least had some cheer in the Chancellor’s Budgets. In particular the 2016 Budget delivered a couple of months ago included many measures specifically designed to encourage personal investors.

Measures this government has put in place or announced include:

  • Increase in the ISA allowance to £20,000 from 6 April 2017
  • Introduction of the Lifetime ISA for those aged 18-40 from 6 April 2017
  • Reduction in capital gains tax
  • Introduction of the Dividend Allowance
  • Increased flexibility available within ISAs
  • Increased pension freedoms

The Government has introduced a range of measures to encourage personal investors and to increase the levels of savings and investments. Recent figures produced by the Investment Association suggest funds saw relatively weak flows of new monies in the last tax year, and dealing volumes from the London Stock Exchange suggest markets such as AIM have seen volumes fall in the last year.

However, it is hoped as uncertainty clears and some of these changes come into force, investing activity and investor sentiment will rise.

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