Decoding the Relationship Between Political Elections and the Stock Market

Whenever there are elections, the financial markets and polity converge, and investors try to make sense of it to make profits. Stock markets are volatile to the changes happening globally. Elections for the top government positions thus have a drastic impact on them. In short, elections affect the stock market but does the outcome of the election have a role to play in the same? In the American context, general wisdom might suggest that Republicans, who are seemingly more business-friendly than the Democrats, would be more beneficial for one's stock holdings. However, that is not always the case. "When we do see a political influence, it is not what might be expected," pens Brad McMillan, Chief Investment Officer for Commonwealth Financial Network. However, stocks perform better in the lead-up to elections when tolls signal a Republican presidential win. Before the presidential elections of 2016, there were many suggestions as to how Trump's election win might negatively impact the stock market. Similar claims were observed in the 2020 presidential elections, but the results proved to be rather shocking and the market touched the sky. A skimpy analysis of the impact of the elections held in the USA and India on Sensex will make things clearer.


Presidential Elections of 2020 in the USA:


The year 2020 was no less than a rollercoaster ride for the stock markets, with the pandemic hitting the country and creating an unprecedented situation for the citizens. The year was no less than a nightmare for the markets with the economy pulling it into recession. Investors faced huge losses as the Sensex continued to fall and rise once in a blue moon, the Indian economy witnessed its deepest dive of a negative 23.9%. But a ray of sunshine cut through the darkness as we moved into 2021, with the Presidential elections in the USA (even after the Capitol incident). The USA witnessed a peaceful transition of power and markets soared high, BSE Sensex hit the milestone of its bull run after achieving the 50,000 points mark.

President Biden's promises and hints of better international relations touched the market sentiments, and his proposed $1.9 trillion stimuli might even keep the global markets raised for some more time. There are undoubtedly other factors like the rollout of vaccines for COVID-19, better interest rates, heavy capital inflows, and government policies, that have a significant role in economic recovery. The future seems optimistic as the previously disrupted demand, consumption, and supply-chains seem to get back on track. The comforting words of President Biden for a better global trade environment might act as a catalyst.


Lok Sabha Elections of 2019:


In the 2019 Lok Sabha elections, the NDA government led by BJP received a whooping majority after securing 352 seats in the Lok Sabha, and Benchmark indices S&P BSE Sensex and NSE Nifty carved profits in afternoon trade following the massive surge. Earlier in the day, Sensex realized over 1,000 points to breach the celebrated 40,000-mark for the first time while Nifty also climbed beyond the 12,000-mark as investors cheered another term for the Narendra Modi-led government. Researchers suggested that the overall market sentiment would remain positive as the administration would remain the same, making it easier for the market to predict government policies.


Lok Sabha elections of 2014:


In the 2014 Lok Sabha elections, the NDA government led by BJP received a clear mandate with an absolute majority of 282 seats in the general polls after about three decades. The market reacted with the BSE Sensex soaring its lifetime high of 25,375.63 after the result showed that the NDA was all set to form the next government. The NSE Nifty achieved the 7,500-mark to hit an all-time intra-day high of 7,563.50. Interestingly, in the same year, the market experts suggested that if the Modi government wins the elections of 2019 as well with a majority of more than 300 seats in the Lok Sabha, then the Sensex could cross the 40,000 mark as well. This prophecy proved to be true in 2019 and made one thing clear, those investors who could predict the government policies or the election outcomes, are the winners at the end of the day.



The graph represents the movement of the BSE benchmark index and clearly indicates how its graph slides upwards during times of elections. Therefore stock markets react drastically to political happenings like general assembly elections, the launch of important government policies, or the presentation of the union budget. They may react negatively or positively depending on the national interest. If a government is formed at the centre with an absolute majority, the markets sore high, and if the government falls the markets fall. Those who understand this relationship get their pockets heavy with profits.



References:

https://indianexpress.com/article/explained/sensex-at-50000-explained-for-investors-7156561/


https://www.businesstoday.in/markets/market-perspective/sensex-at-50000-what-happens-next/story/428626.html


https://www.indiatoday.in/business/story/sensex-hits-40-000-for-first-time-since-july-nifty-above-11-800-1613976-2019-10-30


https://economictimes.indiatimes.com/markets/stocks/news/five-ways-the-us-elections-could-affect-equity-markets/articleshow/78440114.cms


https://www.businesstoday.in/markets/stocks/how-the-sensex-nifty-reacted-after-modi-won-2014-elections/story/349133.html


https://www.business-standard.com/budget/2019/sensex-2014-vs-2019

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