No 10 … but do prime ministers really move the stock market?

No 10 … but do prime ministers really move the stock market?

New prime minister Tony Blair and his wife Cherie outside No 10 in May 1997. Photograph: Martin Godwin

The headlines began warning us months ago of stock-market meltdown should the opposition win control after 7 May. “Shares tipped to fall if Labour wins next year’s general election” the Daily Telegraph announced in October, and some business leaders have echoed the sentiment, notably Stefano Pessina, boss of US-owned Boots the chemist. Latterly, it has been the prospect of a hung parliament that has alarmed headline writers. “Wake up, investors: this election will cause chaos in the financial markets” (the Telegraph again).

So what happens if Labour and the Tories are neck and neck while the SNP secures 50 or more seats? We are unlikely to see whirlwind talks to beat the markets’ opening the day after the election. Investors will be forced to judge how much being rudderless matters to the country. After all, the Belgians went for more than 18 months without an official government in 2010 and 2011 with no worse consequences to contend with than a certain amount of mockery from foreigners.

Despite the headlines, markets are much more likely to take account of global events, especially as the companies in the FTSE 100 derive an estimated two thirds of their income from abroad.

It’s a point emphasised by Laith Khalaf, senior analyst at stockbroker Hargreaves Lansdown, who has written a review of elections and stock markets since 1974. As the charts documenting the successive Labour, Tory, Labour and coalition reigns over the past four decades show, each period of continuous office by a political party has seen an overall rise in stock values. But what they also show is that the ride has been bumpy – meaning that, looked at over different time horizons, it has not always been profitable.

Since 1999 and the dotcom crash, share prices have dipped and soared only as far as to recover their previous value. If stock markets had climbed in line with inflation over this century, the index would stand at more than 10000. On Friday it closed at 7089.

At the moment, markets are betting that the US Federal Reserve will delay an interest-rate rise, keeping borrowing easy; that the European Central Bank will keep printing money until it has distributed all the €1.1 trillion it promised; and that low oil prices will keep inflation down in developed economies – giving consumers more cash to spend and cutting business costs.

That’s why New York’s Dow Jones index kept hurtling upwards last week despite one of the worst corporate-earnings reporting seasons in recent memory. Stock markets focus on calculations of future earnings, not what companies are making today.

Here is a look back at what happened after the last 10 general elections, and how the stock market fared under our successive leaders.

28 February 1974

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Harold Wilson enters Downing Street as head of a minority government in March 1974. Photograph: Keystone/Getty Images

Harold Wilson’s Labour party beat the Tories by just four seats. Liberals and others amassed 37 seats, forcing Wilson, already a double election winner (1964 and 1966), to form a minority government. The stock market collapsed by 50% over his eight-month tenure in 1974. But as Khalaf says, this disastrous performance was part of a much wider international picture. “In 1974, the world was facing a global recession, UK inflation was running at nearly 20%, and the oil price had quadrupled in a matter of months, as Arab nations cut supplies and production,” he said.

10 October 1974

After the second election in a year, an investor might well have taken fright. The Bank of England’s base lending rate was 11.5% and share values had spent much of the year in freefall. But an overall majority for Wilson and a concerted effort by the major trading nations to counter the worst effects of the oil price shock put shares on an upward trend. Still, the OECD thinktank estimated that the world economy lost around 3% of GDP in 1975 due to the high cost of oil, and Britain was a big loser. Inflation reached almost 27% and unemployment soared. In 1976, the chancellor, Denis Healey, was forced to take a loan from the International Monetary Fund to shore up confidence.

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The last year of the Labour administration – by which time Wilson had resigned and Jim Callaghan had replaced him – was swamped by industrial action and a second oil shock, but apart from a dip in the autumn of 1978, the stock market was left largely untouched. A turnaround of sorts had been achieved. In 1974, the ratio of share prices to company earnings – a key measure of confidence – had stood at a record low of just under four times earnings. By 1979 it was restored to a more normal 12 times earnings.

3 May 1979

Prime minister Margaret Thatcher took the helm of a boat that had already been somewhat steadied. Noting her determination to tackle inflation, the market plodded along. It was helpful for her that Ronald Reagan’s central bank chief, Paul Volcker, had the same mission. But UK interest rates peaked at 17% in the early months of the government and remained in double figures for another three years.

9 June 1983

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Margaret Thatcher (with husband Denis) begins her second term as prime minister in 1983. Photograph: Manchester Daily Express/SSPL via Getty Images

It was in Thatcher’s second term that the stock market really got the bit between its teeth. The privatisation of British Telecom helped, and the starting gun was fired on a host of other selloffs. Bellwether British conglomerates like GEC, ICI and Hanson performed well. A £1,000 investment when Thatcher became prime minister would come to be worth £20,000 by the time John Major was to leave office in 1992. But as Khalaf points out, this was again a global phenomenon: a £1,000 investment in the US stock market would have done just as well.

11 June 1987

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Having won her third term, Thatcher kicked things off with the privatisation of British Steel. With chancellor Nigel Lawson firmly in charge at the Treasury, the economy was booming. The Big Bang deregulation of the City in 1986 had appeared to herald a new dawn for British banking: instead, most stockbrokers were swallowed up by the Swiss and Americans. Over the election year the market returned 5.4%.

However there was a 30% fall when a wave of global panic swept through the newly computerised market on Black Monday. It was far from a UK phenomenon: the rout started in Hong and hit the US markets just as hard.

Lawson’s subsequent pump-priming with tax cuts and extra spending sent the economy into overdrive and then over the edge into recession in 1989, though this was also shared in the US and much of Europe. The fall of the Berlin wall in November that year proved a bigger stimulus than Lawson’s plan to end double mortgage tax relief.

9 April 1992

John Major outside Downing Street in 1992. Photograph: Jon Jones/Jon Jones/Sygma/Corbis

Investors cheered John Major’s Tory government, which beat all the odds to record the highest popular vote of all time with 14m votes. The FTSE 100 drove higher on the promise of more of those privatisations that had proved so lucrative in the past.

The euphoria was short-lived: by late summer the EU’s exchange rate mechanism was beginning to cause a sterling crisis and on 16 September the new administration was engulfed by Black Wednesday. Stocks tumbled after the UK quit the ERM – before it became clear that going back to a lower floating exchange rate was going to be good for the economy. Meanwhile, the US was booming, like the UK, on the back of low interest rates, cheap goods from China and loose credit controls on investment bank lending.

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1 May 1997

Stock markets on both sides of the Atlantic were in the grip of dotcom fever when Tony Blair arrived in Downing Street. The bull run was to continue until the end of the decade, when investor panic ended the dreams of many paper millionaires. By the end of 2003 the FTSE 100 had lost almost all the ground it had made in the boom.

7 June 2001

Just as for Major in 1992, September proved a cruel month for Blair’s second government. After the 11 September terrorist attacks, markets tumbled as the US prepared for war in Afghanistan and the Middle East. Chancellor Gordon Brown vowed to prevent a recession (which the US suffered) and turned on the public spending taps. Shares climbed back, largely as a result of healthy emerging-market growth and the continued easy credit that triggered property booms in the UK, US and much of the continent.

5 May 2005

Blair’s return was to last until June 2007 when Brown took over at No 10. Almost immediately, he was thrust into a global credit crunch. Although it started in the US, where sub-prime lenders had begun having problems from 2006, UK banks were caught with their pants down. They had lent furiously to climb the investment banking league and many of their loans were now worthless. The crash, when it came in 2008, almost wiped out all the stock market gains under Blair since 1997. Shares began to recover only after a massive stimulus by the major central banks and the decision of most governments to secure the debts of private bondholders – especially those who lent to banks.

6 May 2010

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David Cameron and Nick Clegg on their first day in coalition. Photograph: Christopher Furlong/Getty Images

The coalition’s arrival coincided with the first Greek crisis. Share values dived and have been volatile ever since. But far from joining Greece on investors’ blacklist, Britain – with an independent currency, interest rates at a historical low of 0.5% and £375bn of extra money in the system from quantitative easing – became a safe haven. The peaks and troughs of the last few years all relate to the ongoing battle in Europe over austerity, which has triggered a series of panics.

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As Khalaf says, looking back over the last 40 years, it makes sense that the UK is buffeted by world events, considering how globalised most industries are. “The US is currently the biggest economy in the world and its stock market is commensurately influential. In fact, 22 FTSE 100 businesses actually report their earnings in dollars. The waves caused by the potential for a Greek exit from the eurozone amply demonstrate Europe has some considerable sway on UK stock prices too,” he says.

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No 10 … but do prime ministers really move the stock market?

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