Don’t stress Starmergeddon – Labour will usher in a market rise

I like nothing about anything Labour might do. Despite what the party’s leadership says, they are anti-capitalism, anti-markets, pro-regulation and anti-opportunity. As a rich, free market Yank, I despise all that stuff, always have. Yet these tenets are central to why stocks will rise.

Don’t believe it? Hear me out.

The big question is always whether legislated policies will be better or worse for business than previously expected. That isn’t hard to fathom.

Unlike in Britain, America’s regular four-year election cycle readily displays what I call the “perverse inverse” in the S&P 500 return history.

When America’s Democrats triumph, the fear is in stocks long before the election, hurting stocks. The same goes for the hope when Republicans win. Afterwards, it emerges that neither Republicans nor Democrats can accomplish nearly as much as some hoped or others feared. Stocks pre-price that.

Hence, stocks shine in the pre-election run-up when Republicans are expected to win but lag the following year as disappointment sets in when they accomplish less than hoped.

Inversely, fear of a Democrat win causes a pre-election lag in stocks, after which they then tend to soar with the realisation that Democrats can’t damage as much as previously thought.

It is always surprise relative to prior expectations that moves stocks.

Still not convinced? Here’s the data: in the years of a Republican US presidency win, returns have averaged 15.2pc since the S&P 500 began in 1925, 5pc above its long-term average. However, the following year, in the president’s first year, returns averaged only 2.6pc.

Conversely, in years when Democrats won the presidency, the S&P 500 averaged 8.2pc, but skyrocketed the next year to 17.2pc. Seems perverse. Runs inverse.

It works perversely here, too – just less clearly – due to not having a regular election cycle. British stocks have routinely benefited from positive surprise when global investors realise Labour governments achieve less than was feared pre-election.

In the 12 months after elections that created Labour-led governments since 1923, the FTSE All-Share’s median return is 12.5pc – well above Tory governments’ 7.8pc. Simple fact.

Ignore all the epic fear-mongering, warnings of draconian wealth taxes or capital gains tax hikes, North Sea oil fading and, at best, anaemic growth and flatlining productivity. These fears aren’t new. They reigned when Ed Miliband led Labour. Jeremy Corbyn, too. Same now, different faces.

There’s been plenty of time for investors to have already chewed the implications to death. If markets are even slightly efficient, it is all pre-priced. After all, polls have long foretold a big Labour win.

But also consider global, non-UK factors. The British market always goes with the global tide – maybe more, maybe less, but always with – over the intermediate to long-term. The correlation of the FTSE All Share to the MSCI World over two decades is 0.88, meaning they 88pc wiggle together.

But there’s an elephant in the room: America. Twice in history Britain had a lasting swing from one party to the other while the US swung in the other direction. Yet our markets moved together. The two great Uniteds are united even when our politics disagree.

For example, when 1929’s Great Depression began, Ramsay MacDonald’s Labour government reigned but was thrown out in 1935 for a decade of Tory rule. In America, conservative Republican Herbert Hoover was president in 1929 but he was thrown out in 1932 for 20 years of Democrat rule. Yet British and US stocks wiggled together, riding global economic trends and the Second World War through bear market to bull market and back.

Note also the Blair-Brown years. New Labour’s government lasted from 1997 to 2010, starting while Democrat Bill Clinton was president. Then, in 2000, Republican George W Bush won. He stayed two terms, before America swung left in Barack Obama’s 2008 victory. The Tories’ 14-year run began shortly thereafter.

Did American and British stocks diverge with opposing party control? No! Both flourished in the late-1990s, suffered in the dot-com bust, then rallied in the mid-2000s until the global financial crisis walloped both. A much-maligned bull market followed here and there.

Presuming any party is auto-bullish or bearish is hazardous to your wealth. See elections as stocks do: they squash uncertainty – which creates a bullish market.

In January, I told you that US and British stocks thrive in American election years. No matter who wins, we get clarity on the winner, Congress’s composition and more. That falling uncertainty buoys spirits, boosting stocks.

But US election years are ordinarily back-end loaded. America’s S&P 500 posted 16 positive first halves (in dollars) in election years from 1925 through 2020. The second half rose 15 times.

Britain echoes this. In pounds, the FTSE All-Share rose in 15 of 17 US election year second-halves following first-half gains. We got your back, Union Jack.

So, don’t stress “Starmergeddon”. Instead: think perverse, buy inverse. Buy now.

Ken Fisher founded Fisher Investments and built a fortune estimated at $11bn. He writes a monthly column for Telegraph Money.