Opinion

What the election means to sharemarkets

In the 14 elections since 1983, the average return of the market during the five-week campaign leading to election day is 1.7 per cent.

Elio D'AmatoContributor

Apr 19, 2022 – 5.00am

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Elections are a time of national and economic reflection with questions asked about what we can do differently now to create a better tomorrow.

Obviously, we enter this election with a markedly different tone than three years ago. Back then, battle lines were drawn around the topics of future investments and taxation.

Both campaigns are focused on spending rather solving the bottlenecks in a time where inflation, supply issues, productivity and labour force problems could hinder our development long after polling day.

This round will be an assessment on our navigation of the pandemic and the lasting impacts on society and the economy based on decisions made during the period.

History tells us the market takes a pragmatic view on elections. While these times throw up uncertainties, investors can look beyond the campaign slogans. This is no better evidenced by the 1.8 per cent rise in the market in the lead-up to the 2019 election, despite the opinion polls at the time pointing to a Labor victory on its agenda of tax equalisation and investment reform.

On average the All Ordinaries performs well in both the lead-up to and after an election. In the 14 elections since 1983, the average return of the market during the five-week campaign leading to election day is 1.74 per cent.

After the results are completed, the average returns of the All Ordinaries is 4.41 per cent for the three months post-election day as the afterglow of a regenerated government filled with stimulatory promises lifts the spirits of both businesses and consumers.

Party leadership changes can have an effect

Drilling into the numbers a little deeper, there are some interesting patterns. First is that there have only been eight out of the 28 periods where returns were negative. The most recent was two elections ago where the market fell 2.6 per cent over the five weeks before polling.

The last time a negative period occurred after an election was when the Coalition took control from the ALP in 2013. After the Hawke/Keating victory in 1983, each of the three changes in party leadership since then were followed by a negative period for the market over the short term (Howard/Costello 1996, Rudd/Swan 2007, Abbott/Hockey 2013).

Pleasingly, there have only been two periods where markets were negative both in the lead-up to and after an election. The 1990 election was won back on the hopes of a large surplus fuelled by rampant asset value growth, which by September quickly deteriorated into the “recession we had to have”.

The same occurred in 2007 with the election held 24 days after the market all-time peak in November that subsequently saw the onset of the GFC in 2008.

The most impressive post-election returns of 1983 and 1987 occurred during periods of significant economic reform where productivity-enhancing policies fundamentally changed the trajectory of the outlook for Australia.

Moves to buoy markets

The setting of the Wages Accord, floating of the Australian dollar, tariff removals and financial system deregulation were all designed to make our economy more competitive on a global scale.

Further the floating of the government-run Commonwealth Bank, Qantas and Commonwealth Serum Laboratories (CSL) buoyed sentiment as investors seized on the opportunity to acquire Australian iconic brand names.

Those hoping for similar productivity reforms from either party will be left disappointed for the minute.

Both campaigns are focused on spending rather solving the bottlenecks in a time when inflation, supply issues, productivity, and labour force problems could hinder our development long after polling day.

In the short term, however, these structural issues will likely be washed over by promises of cash support, which should placate consumers and businesses alike.

But one day this issue will need to confronted head on. Because although the phrase “my cup runneth over” may ring true for individuals, business, and economists will always ask “How do we build a bigger cup?” At this early stage it would appear neither party is focused on that.

Elio D'Amato is from the Australian & NZ team at data research firm Stockopedia.