Do election results impact equity markets?
Much ado about... almost nothing.
The general elections are an important event for the equity markets, & lead to considerable uncertainty & speculation as to how the markets will respond to the election outcome.
On analysing the past five general elections to see if the elections have any significant impact on the equity markets, here are my findings:
6 months before & after elections
Over the past five general elections, during the 6-months period before & after election results, the markets have always given positive returns, on an average around 15-20%.
3 months before & after elections
During the 3-months period before & after election results, the markets have mostly given positive returns, on an average around 7-10%.
In 2004 & 2009, the markets fell in the quarter following the results, while in the other 3 instances (1999, 2009, 2014), the returns were positive.
1 month before & after elections
Lower the time duration we examine, more the immediate fluctuations we get. On an average, the month prior & after the elections give us around 1-3% returns.
These are volatile returns.
From lows to result-day highs
The markets have always given significant returns from the lowest lows made after an election result to the high made on the next election day. We can safely say that in the long run, the markets have always gone up.
Published researches
Ch. Balaji, G.D.V. Kusuma, B. Ravi Kumar,.” Impact of General Elections on Stock Markets in India”. (2018). Open Journal of Economics and Commerce, 1(2), pp.1-7.
concluded that that elections do not have a significant impact on the CNX NIFTY, and that the impact of election on average returns is not significant whether in pre or post-election period, for short term, medium term & long term.
Prakash, Ved and Padmasree, Dr. K., Impact of Election Result on the Stock Market, an Analysis of BSE (SENSEX) and NSE (NIFTY) Indexes (September 15, 2019).
found that impact of election results is noticed in the short term and gradually declines in the medium and diminishes in the long-term period. This study concluded that there is no significant relationship in the announcement of election results and performance of the stock market.
Savita, A. Ramesh. Return volatility around national elections: Evidence from India. Procedia - Social and Behavioral Sciences 189 ( 2015 ) 163 – 168
concluded that there is high volatility in stock returns around the elections. The positive returns can be observed 3-4 days before the announcement of the results. This can be attributed to the surveys released before the actual announcement of the results. A strong abnormal rise happens on the date of announcement of election results and the continuous rise in the stock returns continues for a number of days after the event of declaration of results.
TL;DR Do general elections impact the markets?
No, the impact of elections on average returns is not significant, whether in the pre-election or post-election period. But the volatility increases in the short to medium term (1 week to 1 month).
So, just stick to your plan. Anticipate; don’t improvise.