If you didn’t know it yet, this is a federal election year.
That’s not that unusual in Australia, seeing as they happen every three years.
Leading up to every US presidential election you hear analysts explaining what happens to markets after an election and whether a Democrat or Republican is better for the market.
So maybe you’re wondering if there’s a link between Aussie elections and the Aussie market?
We wondered the same thing. Here’s what we found out…
Unfortunately, our data for the Aussie All Ordinaries index only goes back to 1984. So we only have limited stock data. It means the data only covers the last 10 federal elections.
Even so, is there a clear result on what happens during an election year and which party helps the stock market most?
We’ll let you decide that one. Here’s the chart of the All Ordinaries index going back to 1984. We’ve plotted the election year with a coloured dot above the chart line.
A blue dot indicates a Coalition win. A red dot indicates a Labor win.
Index Data: Yahoo! Finance
How you interpret the chart will probably depend on your political allegiance. At first glance we notice one thing: both Labor and Liberal have presided during exuberant bubbles – Labor leading up to the 1987 crash, the Coalition leading up to the 2008 crash.
But aside from that, we’re not convinced there’s any link between election results and stock markets. Here’s why…
It’s Important to Know What’s Not Important
The reality is that there isn’t as much difference between major political party policies as they would have you think. That goes for any political party in the western world.
So it’s pointless to say that one party is better than the other.
Besides, the main drivers behind stock market growth have been the loosening of monetary policies and improvements in technology. This has occurred under political parties of both the so-called Left and Right.
In short, any attempt to link the performance of stocks to the election of a political party is just plain junk. So why are we wasting your time by devoting today’s Money Morning to the subject?
Well, sometimes it’s just as important to show you what’s not important as it is to show you what is important.
And devising your whole investment strategy around which political party can buy off the most votes is no way to invest.
However, if you’re determined to play around with stocks as a way to make a buck or two from the federal election, there is one stock that appears to have become the barometer for the electoral fortunes of the two main parties…
Use Company Fundamental Analysis Not Political Analysis
Punting on a stock or index purely based on which party could win an election is a mug’s game.
That said, if you’ve paid much attention to the news in recent weeks you’ll know the federal government changed the rules on the fringe benefits tax (FBT) treatment for work vehicles. It caused a storm, with car leasing firms laying off workers within hours of the announced changes.
One of the companies hit the hardest was ASX-listed McMillan Shakespeare [ASX: MMS]. The stock fell from $18 before the announced change to as low as $6.75 just a few days later.
Since then McMillan Shakespeare has recovered some of the lost ground as investors bank on a policy U-turn. Now, that could come from either party. But there’s little doubt that most investors see the prospect of a Coalition victory as the main reason to punt on the stock.
But it’s a big gamble. As you can see from the following chart, the stock was trading at a record high just before the change to FBT rules:
Source: CMC Markets Stockbroking
The stock price had climbed from $2.50 in 2009 to $18.64 just a few weeks ago.
But even if the FBT rules change, there’s no guarantee the stock will return to its former glory. After such a big run-up there’s always the chance that the company couldn’t have kept up with investor expectations anyway.
And that’s not the only risk. You also have to consider how much investors have already priced in a Coalition or Labor victory. So even if the Coalition wins, there’s no guarantee the stock price will climb further.
And likewise, a Labor victory won’t necessarily mean the share price will fall.
As we say, using elections to bet on stock market returns is a mug’s game. Stocks rise or fall based mainly on earnings and interest rate expectations. An election result or policy can impact that, but it’s not the only factor.
There are much better ways to play the market than studying election results.
You should invest based on company or market fundamentals (such as Nick Hubble’s brilliant analysis of a multi-billion Chinese ‘white market‘ play) not based on how many punters a political party can swindle into voting for them.
Cheers,
Kris+
From the Port Phillip Publishing Library
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Australian Small-Cap Investigator:
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