Elections: does it have a meaningful effect on your investments?
The Indian general elections have a discernible impact on the stock market, and understanding historical trends can guide investors. Historically, volatility in the market goes up significantly one month before the result date and reduces after results are announced.
Imagine the stock market as a roller coaster ride. This year, the market was expecting the same government to stay in power after the elections. So, like a roller coaster going up, the market kept rising until about a week before the exit polls (when they predict election results). But then, things got confusing. The rumours around exit polls gave mixed signals, like someone shouting “left” while the roller coaster was going right. This caused a week of downward corrections.
Over the weekend, the exit polls were announced, and guess what? They matched what the big market players expected. So, the market rebounded, like the roller coaster suddenly going up again.
This is an example of how irrational the market can be in the short term - it is purely driven on the behaviour of the majority of the market participants and nothing to do with fundamentals. Now, let’s zoom out. These ups and downs around elections don’t really matter much in the long run. Whether the election result is “positive” or “negative,” it tends to fade away over time, like the excitement of a roller coaster ride after you step off.
Traders (the folks who play the stock market like a game) are the ones who benefit from this, they love short-term volatility. They make money by betting on whether the market will swing up (by going long) or down (by short selling) based on these election moves.
Let’s explore some examples of the Indian stock market performance during general elections:
1999 General Elections:
After the Kargil War, the BJP-led National Democratic Alliance (NDA) secured a clear victory.
The stock market showed resilience, declining by only 2.10% in the month after the elections. However, it rebounded strongly in the following six months, gaining an impressive 40.20%.
2004 General Elections:
The unexpected victory of the Indian National Congress (INC)-led United Progressive Alliance (UPA) led to a significant drop in the stock market.
Investors faced uncertainty, resulting in a bearish trend during this period.
2009 General Elections:
The stock market was already recovering from the 2008 global financial crisis, and investor sentiment was cautious. Reacting to the exit polls, the market exhibited mixed signals as it slipped but managed to remain above the key moving averages.
Despite the mixed exit polls, the stock market exhibited resilience. The Sensex and Nifty 50 soared over 40% each from May 18 (the first trading day after election results) to December 31, 2009.
2014 General Elections:
The 2014 elections were a turning point for the Indian stock market. The BJP’s promise of economic reforms and a business-friendly environment led to renewed optimism among investors.
The Sensex rose by approximately 25% in the months leading up to and following the election results.
2019 General Elections:
The BJP-led NDA secured another victory, and the stock market responded positively.
Despite initial volatility, the market rebounded significantly in the long term. Many stock indices hit all-time highs, reflecting investor confidence in stability under the BJP-led government.
In essence, the Indian stock market has demonstrated resilience in the face of election-related uncertainties, emphasizing the significance of long-term structural reforms as drivers of sustainable growth. These historical examples highlight the importance of staying invested and focusing on broader economic trends rather than short-term election noise.
