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The immortal lines by Scarlett O’Hara in Gone with the Wind; to which Rhett Butler responds “Frankly, my dear, I don’t give a damn”.
When I think of the election, the headlines, the questions asked of fund managers and the general guessing as to what will happen I feel a little like Rhett Butler. It sounds very harsh and perhaps a little arrogant but there are good reasons for this.
History
If you look at every election since 1987, despite volatility around election time, the stock market has been positive (with the exception of 2001):
1987 – 8.44% 1992 – 20.49% 1997 – 23.56% 2001 – (-13.29%) 2005 – 22.04% 2010 – 14.51% 2015 – ?
Source: FTSE All Share Index Total Return. Past performance is no guide to future performance, and investments can fall as well as rise.
If we compare 2015 to 2001 and 2010, they could not be more dissimilar.
Between 1999 and 2001 we saw the collapse of the dotcom bubble and in 2001, the events of September 11. These factors drove down the markets, not the result of the election.
In 2010 we were coming out of a global recession, and many economies were in a fragile position. Despite this the markets posted positive returns for the year.
In 2015 we sit on a very different landscape. The UK is on the upward curve of recovery. Generally people are feeling happier, people are spending on luxury items again – Waitrose recently announced that premium toilet tissue sales are up 12 per cent year on year! And those infrastructure projects that stopped in 2008 have restarted in earnest; the change in the Bristol skyline over the last 3 years is testament to that.
Fundamentally whatever happens in the election shouldn’t derail the recovery and if we look at 2001 (which wasn’t affected by the elections) and 2010, then in theory 2015 should be positive for the markets.
And what about the election?
What is possible from the election is that there will be a minority government, whether Conservative or Labour.
It means to get things done will be difficult, but actually doing nothing can be good for the markets. Stirring up fears around the balance of power being held by the SNP and UKIP is just that, it is even possible that Labour and Conservative could work together!
The point is that we don’t know, but the country is in a strong place and all there will be is short term volatility and this is likely to iron itself out over time.
Should we be fearful?
We often mention the unknown unknowns.
In September 2014 the biggest fear was around the Scottish Referendum and what would happen if the Scottish People voted “yes”. There was volatility with the referendum but it was not this that had dampened returns, it was the collapse in oil prices that no-one had predicted.
If we look at 2001, the market might have recovered some of the losses from the dotcom bubble bursting if it had not been for September 11.
Although there was not an election in 2011, fears over Europe drove down the markets.
One of the reasons why I was optimistic at the start of the year was that I felt that much of what happened in 2014 has been priced into the market and the pessimism would reverse. I still remain optimistic for 2015 but I don’t know about the unknown unknowns.
There are elections in the UK and Spain, these will happen, there will be volatility but assuming nothing happens that we haven’t seen, then the volatility will wash through. History time and time again shows this.
Power of diversification
Individual stocks could be volatile – a labour government could impose stealth taxes on banks and utilities. However, with banks how much will they change when this is the golden goose!!! They are unlikely to kill something that will bring them money.
However, good diversification of assets will help. If all your assets are invested in UK funds then the volatility in May is likely to be greater than when having a spread of funds which are globally diversified.
“Frankly, my dear, I don’t give a damn”
Of course we care if investors’ money goes down, but investing will have volatility and certain events will create greater volatility over short periods of time. Often those events that we know about allow the market to price this in and work through it. The election will happen, volatility will happen but in all of this the likely scenario is that it will be okay.
If the conservatives win then the next spike in volatility will be the referendum on Europe, and there will be others.
“Where shall I go?” “What should I do?” – it’s something I keep reading in the papers; adding fuel to the fire of fear – the answer in my view is simple. Stick to the plan, hold tight and more than likely it will ride through.
Where my fear lies is the unknown unknowns but I don’t know when those will happen, what they will be or what impact the “unknowns” will have!!!!
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.