It has been impossible to miss the political entanglements over recent times between the UK and the US.
We have seen political unrest between parties, national and international contention, US election fraud claims, the attempted assassination and subsequent re-election of Donald Trump, and now we face the real possibility of UK tariffs imposed by the new president.
In recent years, market confidence has been shaken by many factors. Uncertainty seemed to be concentrated during Brexit negotiations, during which there was a change of leadership.
Implosion within the UK parties during the Covid-19 pandemic, followed by conflicts in Ukraine and the Middle East has created a volatile environment for investors. This had led to fluctuations in the British pound and stock market instability.
While this may be interesting reading, you might wonder what effect politics might have on your investments.
I think it’s safe to say that most political events have the potential to have a significant influence on market performance, investor confidence, and economic stability, whether that be a negligible ripple, short-term volatility or a longer-term decline in value.
3 ways markets may react to political uncertainty
1. Immediate reactions
Markets often react quickly to political news, such as elections, policy changes, or geopolitical events.
A recent example of this is Donald Trump’s re-election and the subsequent threat of imposed tariffs – mainly focused around China, Canada and Mexico, although the threat is being extended to Europe, and possibly the UK.
The threat of a trade war has led directly to a noticeable impact on market performance, particularly for those companies reliant on imports and exports within these regions.
2. Long-term effects
Long-term impact depends on the nature of the event and the implications.
An example of this is the record-high inflation rates starting in 2022, when the Consumer Price Index (CPI) reached its highest levels since 1981, peaking at around 11%.
This together with global unrest, a drop in the performance of the bond market and Kwasi Kwarteng’s 2022 mini budget led to a downward trend in the markets.
3. Investor sentiment
Political stability can have a varying impact on investor confidence.
Positive news such as favourable trade agreements can boost market sentiment, while negative news, like political unrest, can lead to market downturns.
The 2023 Spring Budget, put in place by former Prime Minister Rishi Sunak and former Chancellor Jeremy Hunt, led to the beginning of political stability, and the investment markets started to improve.
Political change
Election cycles are another aspect of politics that can influence the investment market. They often bring uncertainty, and speculation about potential policy changes and their subsequent implications can lead to volatility.
In the UK we have seen Labour take charge for the first time in 14 years.
At first, the population seemed to welcome the change, but it did not take long for the new Government to begin to face a backlash, with negative sentiment swiftly setting in following headlines of Starmer accepting gifts, a U-turn in his support for the Women Against State Pension Inequality, and the withdrawal of Winter Fuel Payments for pensioners.
Chancellor Rachel Reeves’ announcement of a ‘black hole’ in the country’s finances and steps to mitigate this with substantial employer tax increases have led to a drop in business confidence.
Even with the announcement to cut spending and reduce the ‘black hole’, UK borrowing for the 12-months to December 2024 was the second-highest since monthly records began in January 1993, and there is speculation as to whether the planned spending by the Labour government is affordable or achievable.
Is it possible to mitigate the impact of a volatile market?
As we have seen, politics and the investment market are heavily interlinked, with political events and decisions shaping the dynamics of the investment market over both the long and short term.
Economic policies, political stability, and election cycles all play crucial roles in influencing both investor behaviour and market performance.
At Armstrong Watson, we believe in the philosophy of ‘time in, not timing’.
This approach, along with sound financial advice, should help to mitigate any long-term effects of market volatility.
Receiving financial advice for your long-term goals is imperative in achieving a successful outcome.
