Investment Insights - Hot Topics June
Welcome to Balance: Wealth Planning's Hot Topics!
Balance: Wealth Planning's June edition of Hot Topics.
Every month, our financial planners will collate the latest 'Hot Topics' within the industry, which we will share with you. The purpose is to update you regularly as these topics are happening and help cover any frequently asked questions.
So, without further ado, please enjoy this edition of Hot Topics!
The General Election 2024
It's natural for people to look for a link between the outcomes of political elections and what will happen with the stock market. There will be 64 national elections in 2024 globally (with some already taking place). Most people focus on the UK and the US general elections.
So, do these elections affect the stock market?
The answer can be surmised simply as follows: in the short term, yes, and in the long term, no. In the short term, like with any news, the result of a general election can cause the stock market to move, whether that is positive or negative. This is simply the market trying to price the new information to implement new policies with the latest party in place. Predicting the short-term direction of the market is near impossible.
2016 is a great case study for this. Trump won the US election in November, something most news outlets and political commentators didn't believe was possible. Initially, the market sold off as this was not priced according to the consensus. However, within a day following the election, markets started to rally as participants digested Trump's fiscal policies and concluded they were positive for business and the economy. So, even if you had predicted the election outcome, it's unlikely you would have been able to predict the market's reaction.
Over the longer term, which is more important to focus on for wealth creation, we have seen that whoever wins the general elections in the UK or the US does not affect the stock market's longer-term returns. The two charts below demonstrate this. The first chart, by Dimensional, shows the return of the S&P 500 index from 1926 to 2022, highlighting the time periods the various presidents were in charge of the US. We can observe that regardless of who was in power, the stock market continues to rise over the long term as the economy grows. While there are dips throughout the time period as various differing events occur, the trend remains that politics do not alter the upward trajectory of the stock market over the long term.
by Dimensional, shows the return of the S&P 500 index from 1926 to 2022.
The same can be said for the UK. The chart below also from Dimensional shows the growth of £1 invested in the Dimensional UK index fund from January 1956 to December 2023.
Dimensional UK index fund from January 1956 to December 2023.
This chart is for illustrative purposes only. It does not constitute investment advice and must not be relayed as such.
What does this mean for your investments?
We would always caution investors against making short-term changes to a long-term plan to try and profit or avoid losses from changes in politics. We mustn't forget that the stock market is an information-processing machine. With the combined impact of millions of investors trading billions of pounds and dollars each day, the market prices incorporate investors' expectations. Trying to outguess these market prices is consistently challenging. As we saw in 2016, while surprises in elections do happen, the surprise does not always lead to the outcome you thought might happen.
Please note: This update is not financial advice and is provided for information only. You should not take any action before speaking to a Financial Planner, who will confirm what suits you.
Please feel free to share it with anyone who may be interested. If you have any questions, please get in touch with your usual contact or investments@balancewealth.uk.