One of the most amazing things about the stock market is that they have been very accurate in showing us who is going to be the next President or Prime Minister. The stock market can also predict which party is going to be in power for the next 4 to 5 years. I invite you to take a look at some of the elections that have taken place in recent history.
The stock market has correctly predicted elections results of:
Let's not doubt the ability of the stock market. Take a look at the charts below and decide for yourself.
For those who are skeptical about why the stock market can accurately predict elections, I will try to explain this concept as simple as possible.
If you study history, you will realize that politics is often connected to economics. Throughout history, those who are in power will usually have the most gold. Which is why people like to be kings and war lords and earls and your majesties! For when you are in power, you have the ability to change the rules to suit you. You also have the ability to appoint people who are sympathetic to your cause to important positions who will in turn enrich your coffers.
Modern democracy with its political system and election rules is designed to achieve a separation of power between the legislative, judiciary and the executive. This is to ensure accountability and absolute power vesting in someone or some group.
Despite all our effort to limit the powers of the executive, the people who are governing the country still yields an enormous amount of power. The power itself stretches into the economy of the entire country.
Now that you understand a bit about how the people in power can affect the economy, it makes sense that the rise and fall of share prices are connected with who is in power.
Take for example, the current President of a fictitious country called "Moneymania" allows the mining of gold in his country. The gold digging industry has companies that are listed in the stock market in Moneymania. However, the opposition leader are anti gold mining because it destroys the environment and vows to abolish gold mining if he gets into power.
In the coming elections, the polls predict that Opposition leader will secure a 60% majority and come into power. What do you think will happen to the stocks of gold mining companies? They will collapse of course.
The above is just a simple explanation of how the stock market is affected by the rise and fall of governments. The truth is that when a party comes into power, their tentacles of influence can stretch far and wide and deep into the economy of a country.
Therefore, if an incumbent government gets out of favor with the citizens of a country, the stock market is likely to fall because there will be a big shake up in the the economy. Uncertainty will cause investors to start throwing away shares of different companies in the stock market.
On the other hand, if the incumbent government is well loved by the public and they are expected to stay in power, the stock market will usually rise a few months before the elections. Nobody is really selling shares because they know that the incumbent will stay in power and things will still be the same after the elections.
Before one can use the stock market to predict an election, there are a few rules that you need to know before we can correctly utilize the stock market as an election prediction vehicle.
Here are the general rules to help you interpret what the stock market is trying to tell us about the results of an election.
*Markets in UK were acting very strange in 2010. It could not predict a winner accurately. Turns out no party won a majority and a coalition government had to be formed.
The French Presidential election was a mess with the incumbent president not standing. Emmanuel Macron has won the Presidential election. The markets reacted wildly when he lead in the first round. The French and European markets all rose. The second round which Macron won did not brought the same type of reaction as his victory was already priced in.
As we can see from the chart above, the market reacted very well to a Macron victory. The rising stock market may still be predicting a Socialist Party majority in the Legislative Election 2017. This will most probably result in France having a President which is not from the majority party.
On April 10 2017, the British Prime Minister Theresa May made a shocking announcement to have a snap election on June 8 2017. This was so that she could have a stronger hand in the negotiations of the Brexit with EU. May also wanted to have a bigger majority on her own so that she have a mandate of her own and not from the mandate the public gave David Cameron in 2015.
While the polls were initially telling us that the Conservatives will return with an even bigger majority, the stock market was telling us to be cautious. At the time of this writing, according to CNN, the Conservatives have won 316 seats. There are still 3 more seats that have not been reported. In order to secure a majority, Theresa May needs at least 326 seats. Therefore, the Conservatives will not be able to form a stable majority government.
Someone asked me about the UK election the night before election and this was what I wrote:
"I try not to be bias because I like Theresa May LOL. I think UK will be better of with her as Prime Minister. Previously, it was thought that Theresa May will end up in No.10 with an increased majority. With two terrorist attacks and a drop in polls (which are quite unreliable in recent years) it may hurt her chances of securing a big majority. There are talks of a hung parliament like the one David Cameron experienced.
Looking at the futures chart of FTSE 100, the indications are telling us that Theresa May will still return to No.10 but not with the bigger majority that is expected. The stock market has an 80% success rate of predicting the winner. Since March, the FTSE 100 has risen but not as much as I would like to see. The other thing I look at is who Dailymail.co.uk supports. http://www.dailymail.co.uk/news/article-4578758/The-Mail-s-essential-tactical-voting-guide.html take a look at this article and you will realize they support Theresa May.
Somehow this newspaper which has a huge online presence have huge clout to influnece voters. They support Cameron in the past, supported Donald Trump for presidency and Theresa May for the conservative leadership struggle. I hope Im not bias, but most likely May will continue to be the "first among equals".
But in my opinion if she wins this one, she should serve a max of 2 terms cos the British has a history of disliking their premier by the third term. Better to exit with grace than to be kicked out eventually. For traders: In the event a surprise outcome happens, I would start to look for support areas in the Dow and S&P 500."
Well, as far as I can see, the FTSE 100 has once again been quite reliable in giving us the probable outcome of the UK General Election in 2017:
Most probably Theresa May will be able to form a minority government with the help of another party. The odds is easier for the Conservatives. Labour will need to hammer out more pacts and agreements with many parties. But one thing we are certain is that Theresa May's future is not so bright at the moment.
No matter who becomes the Prime Minister, May or Corbyn or another Conservative politician, I think the UK will still be headed for a Brexit. Which is why the FTSE 100 and Dow Jones will not be affected so much by the election results as I pointed out in my daily stock market analysis titled Dow Jones Index Market Analysis June 8 2017 - The UK Election 2017.
The stock market once again succeeded in predicting the winner of an election. This time the accurate predictions happened in Japan. 3 months prior to the national elections in 2017, the Japanese stock market had a furious rise especially 1 month before the election.
The bigger the rise, the bigger the majority it will mean for the incumbent party. As at the time of this writing (which is one day after the election on a Sunday October 22 2017), Shinzo Abe's party and their coalition is expected to take at least 312 seats out of 465 seats in the Parliamentary lower house.
This win is a landslide victory and easily gives Shinzo Abe a 2/3 majority in the Parliament. Abe will most likely be able to extend his power and premiership up to 2021.
Take a look at the chart above. It is the daily chart of the Nikkei Futures. From July 2017 to October 2017, the Japanese market rose from about 20000 to 21738. This told us that the markets have faith that an Abe victory will be at hand.
There was some correction in August and September 2017 and it is quite normal. Investors can sometimes be afraid when an election is coming near. But as long as the stock market rises and makes a gain for the entire 3 month period, then the incumbent party will usually remain in power. If the market falls during the 3 months, then it favors a victory for the opposition.
If you think about it clearly, it makes good sense why the stock market can be a very very useful prediction of who will win the next national elections. Investors will usually do a lot of study and they may even spend money to try and gauge who will win the elections by sending scouts all over the country. If the investors come to a conclusion that the incumbent will remain in power, they will step in and continue to buy more shares.
On the other hand, if the investors come to a conclusion that the opposition may win, then they will start to sell the shares of companies that will receive a knockout blow in the event of a collapse in the incumbent government. This will induce selling in government related shares. Uncertainties will also cause investors to sell shares in most companies.
Notice how one month prior to the election, the Nikkei actually rose furiously. This actually hinted to a landslide victory by Abe.
While the only certainty in life is "change", the stock market has been very reliable in predicting election results. Not only the US Presidential Elections but also elections all over the world. Its amazing why all these happen. But perhaps when you have money involved, investors will always move money in and out depending on who will take power. There will be no 100% accuracy but when you have an indicator that has been correct more than 80% of the time, you will be wise to pay attention to it.
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Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
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