The Garrulous Jay – Politics & Performance

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The opening lyrics of The Smiths song, “What Difference Does It Make?” are as follows:
All men have secrets and here is mine
So let it be known
For we have been through hell and high tide
I think I can rely on you
And yet you start to recoil
Heavy words are so lightly thrown

At least some of these lines struck me as apposite as I sat through this week’s televised Leaders’ Debate, listening to Sunak and Starmer lightly throwing words at each other. I was already considering whether politicians, and governments more widely, make a difference to stockmarket performance.

The table below shows the performance of the FTSE 100 index of leading UK-listed companies going back to the June 1987 General Election.

The conclusion one might draw is that Tories are good for the markets, with Thatcher and Major in particular presiding over rip-roaring stockmarket performance. In contrast, under New Labour the FTSE 100 delivered a pretty underwhelming return.

Taking the return per day under different administrations over the whole time period, the FTSE 100 has risen 0.022% under the Tories compared to 0.005% under Labour: a more than four-fold difference.

Those with an eye on their investments might conclude they should vote for the pro-business, pro-free enterprise & innovation, pro-tax cutting Tories.

I reality I think this is nonsense.

Tables like this are in fact an exercise in misinformation rather than illumination. They tend to mask the underlying factors at play that actually drive stockmarket returns, and over which governments of any and every political hue have little control.

Thatcher and Major were to some extent the beneficiaries of a period of technological progress and economic stability. While New Labour benefited from the dotcom boom, but that particular bubble also burst while they were in office, and this was followed just seven years later by the Global Financial Crisis.

The markets have been in recovery mode for much of the period since then, during which the Coalition and then the Tories’ terms in office have been characterised by more subdued growth.

Perhaps the only event over which a UK government has had direct control, and which may have impacted upon stockmarket performance throughout this period was the Brexit vote. As the OBR concluded in May, “The post-Brexit trading relationship between the UK and EU, as set out in the ‘Trade and Cooperation Agreement’ (TCA) that came into effect on 1 January 2021, will reduce long-run productivity by 4 per cent relative to remaining in the EU.”

But even arguing this has directly impacted upon the performance of the FTSE 100 is questionable, given the highly international nature of its constituents’ earnings.

It is unsurprising that politicians of all colours make bold promises about the economy and growth, and perhaps they can make a difference domestically. But when it comes to stockmarket returns investors can largely ignore domestic politics.