Hopes of post-election rally may be just wishful thinking
Research from Goldman Sachs has dampened hopes of a post-election fillip on equity markets, saying that historically there is little evidence to support that theory.
Goldman strategist Tim Toohey said changes of government in the past had actually had the opposite effect, resulting in a period of slower, rather than accelerated, economic activity.
"The assumption that elections lower confidence and delay spending in the lead-up to the poll date is not supported by the economic data," Mr Toohey said.
"[And] we find little evidence to suggest that the passing of a federal election results in a surge in retail spending, confidence and asset prices.
"Typically, the $A declines, equity markets decline, bond yields rise, and the path of economic indicators is mixed in the months following the result."
Mr Toohey said in the past three elections in which there was a change in government, the equity market sold off 1.2 per cent a month before the poll, was 0.2 per cent in the week afterwards, down 0.9 per cent in the fortnight, and a month later was down 2 per cent.
In the case of the Australian dollar, Mr Toohey said a change of government had historically resulted in a 2.6 per cent fall in the week after the election and held onto those losses for the first month of the new regime.
Bond yields, meanwhile, have risen on average 4.2 per cent in the month afterwards.
Mr Toohey said it was possible there would be a lift in some measures of confidence but it would be mild.
He said it was unlikely that business conditions would recover without a broad-based recovery in consumer spending, adding that "slowing household income growth suggests a cautious consumer will persist. Recent easing in financial conditions and the rise of household wealth through 2012-13 will help, but the lags from both forces are long and in the interim they will have to navigate further fiscal drag."
But despite Mr Toohey's conclusion based on hard evidence, talk of happy days on the ASX after the poll is still swirling.
RBS Morgans chief economist Michael Knox said in a client note that regardless of who won the election, a clear result would boost the sharemarket.
"A look back at the last 30 years and 11 elections has seen the Australian stockmarket increase by 1.31 per cent each month on average in the three months following an election. That equates to an almost 4 per cent gain for the quarter immediately following an election," Mr Knox said.
"This increasing confidence acts like a reduction to the risk premium and is similar in its effect to an interest rate cut in that the flow-through to GDP has a lag of about five quarters. Therefore, we should see the more long-lasting result from an election outcome continuing on throughout 2014."
But Ig Markets strategist Evan Lucas agreed with Mr Toohey, saying whatever happened on Saturday it was unlikely that Monday morning would "see a scorched-earth or grass-is-greener moment".
Mr Lucas said the markets were more likely to react to global issues - the US Federal Reserve meeting on September 17-18, where it is widely tipped the central bank will agree to start winding back its $US85 billion-a-month stimulus; the German election on September 22; and the Syrian conflict.
"This election from a market perspective is a non-event," he said.
Frequently Asked Questions about this Article…
Many analysts expect a clear election win to boost the economy and consumer confidence, but Goldman Sachs research cited in the article finds little historical evidence that elections cause a sustained lift in spending or asset prices. Goldman strategist Tim Toohey says changes of government have often been followed by slower, not faster, economic activity.
Not necessarily. Goldman Sachs argues there is little evidence of a reliable post-election equity surge, and past changes of government have been followed by market weakness. However, RBS Morgans’ chief economist Michael Knox points to long-term averages that show modest post-election gains, so outcomes can vary and are not guaranteed.
According to Goldman Sachs’ Tim Toohey, in the past three Australian elections with a change of government the equity market sold off 1.2% in the month before the poll, was down 0.2% in the week after, down 0.9% in the fortnight after, and down about 2% one month later.
Goldman Sachs’ research shows that when government changed historically, the Australian dollar fell about 2.6% in the week after the election and tended to hold those losses through the first month of the new government.
Yes. The article cites Goldman Sachs saying bond yields have risen on average about 4.2% in the month following a change of government.
RBS Morgans’ Michael Knox argues that a clear result can lift confidence and reduce the risk premium, acting somewhat like an interest-rate cut. He notes that over 30 years and 11 elections the Australian stockmarket increased on average 1.31% per month in the three months following an election, with potential flow‑through to GDP over subsequent quarters.
IG Markets strategist Evan Lucas suggests the immediate market reaction is more likely to be driven by global issues — for example the US Federal Reserve meeting, the German election and geopolitical risks — rather than a dramatic ‘post-election’ move on the Monday after the poll.
The article suggests investors should watch fundamentals like consumer spending, household income growth and broader financial conditions. Goldman’s Tim Toohey warns that business conditions are unlikely to recover without a broad-based rise in consumer spending, and that easing financial conditions and past household wealth gains have long lags and may be offset by fiscal drag.
Call 1300 880 160
Start a chat
Schedule a call
