Is a Conservative or Labour government better for the stock market?

Politicians are set to step up their attempts to woo voters in the coming weeks with TV debates and the launch of party manifestos ahead of the general election – but what does this mean for investors?

The economic and fiscal environment created by a government can be a big factor in how to invest and choosing where to put your money.

You only have to look at the reactions to the mini Budget under Liz Truss that sent swap rates and inflation soaring due to un-costed measures to understand how government policy can sway financial markets.

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The main parties have already hinted at how they would manage the nation’s finances when it comes to areas such as tax and pensions.

Policies won’t be confirmed until manifestos are published and the new government after the general election on 4 July will also need to take account of the economic environment when they come to power before making a decision.

The reaction of the UK stock market to previous governments may provide a clue for investors.

Past performance, of course, isn’t an indicator of future trends but research by Investing Insiders has revealed how various stock markets have fared under the previous prime ministers dating back to Margaret Thatcher in the 1980s.

The research is skewed by the Conservatives being in power for the majority of that period while there is wider economic context over the 40-year period such as the dot-com crash and global financial crisis.

“While politics shouldn’t normally be the sole determinant of guiding an investor’s decision, it’s still important for investors to know the potential impacts a new political party may bring,” says John Choong, senior equity research analyst for Investing Insider.

“A Conservative government may be more likely to reduce taxes historically than a Labour government. This may have an impact on earnings, as companies will be able to hold onto more of their profits, thereby boosting share prices — share prices tend to trade in tandem with earnings growth.

“That said, it’s a little bit more nuanced than this, as other policies and external factors could play a role in impacting the stock market’s performance.”

How have stock markets fared under Conservative governments?

There have been seven different Conservative governments dating back to the 1980s.

This includes Thatcher, who was prime minister between 1979 and 1990, followed by John Major until 1997.

The Tories returned to power in 2010 in the Conservative and Liberal Democrat coalition led by David Cameron.

The Conservatives took a majority at the 2015 general election, giving Cameron another tenure as prime minister until he was replaced following the Brexit referendum by Theresa May.

Boris Johnson replaced May as prime minister in 2019 and lasted until 2022.

Liz Truss became prime minister in September 2022 but only lasted 49 days before she was replaced by Rishi Sunak.

The UK stock market has fallen from its all-time high since Sunak announced the general election date.

But on an annual basis the FTSE 350 actually has the second best performance under Sunak, at 11.1%, the Investing Insiders research shows.

He is beaten by Major, with the index posting a per annum performance of 16.8% while he was in charge..

Thatcher was third, with the stock market returning 8.9% annually during her premiership.

On a total return basis, the FTSE 350 did best overall under Major, up 108%, while Thatcher had a return of 43.8%.

The UK stock market made a loss under Johnson and Cameron as well as Truss, where the FTSE 350 fell 32.1%, according to the research.

How have stock markets fared under Labour governments?

There have only been two Labour prime ministers since the 1980s, Tony Blair from 1997 to 2005 and Gordon Brown until 2010.

The FTSE 350 rose by 5.5% annually under Blair or 55.9% in total during his time in Number 10 - the second best out of all recent prime ministers, according to the Investing Insiders research.

However, the stock market under Brown fell 5.4% annually between 2005 and 2010 and by 15.4% overall.

Is a Conservative or Labour government best for the stock market?

This is where context is important, adds Choong as it isn’t just the party in charge that matters but also the wider social and economic environment.

“The FTSE 350’s slump under Brown’s tenure was largely due to the global financial crisis in 2008, while Tony Blair oversaw the crash of the dot com bubble and the recovery thereafter.

“Ultimately, investors should pay more attention to the underlying fundamentals of a company/fund, while keeping an eye on how potential policies may boost or hinder their growth, rather than basing their investing decisions purely based on politics."

Research by AJ Bell based on the performance of the FTSE All Share Index since 1962, suggests the stock market is rarely rattled by a new government.

In fact, the FTSE All-Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another new one ushered into it.

AJ Bell investment director Russ Mould says inflation also sorts out the real winners and losers from the markets’ perspective, when it comes to individual prime ministers.

Rather than worrying about the size of a government majority, Mould highlights the term made famous by former US president Bill Clinton’s strategist James Carville, - 'it’s the economy, stupid.'

“If the voters feel flush, they are more likely to vote for the incumbent government and less so if not, and inflation is a key part of that,” he says.

“The galloping inflation of the 1970s, and subsequent labour unrest, did for both Conservative Ted Heath in 1974 and Labour's James Callaghan in 1979. In the latter case, public appetite for a change of tack was particularly strong and ushered into power the nation’s first female prime minister.

“Gordon Brown had little or no chance, having had the bad luck to preside over the Great Financial Crisis of 2007-09 and Tony Blair’s second term coincided with the bursting of the technology, media and telecoms bubble, the blame for which could not be laid at Downing Street’s door under any circumstances.

“What will be interesting this time around is the degree to which inflation and the economy shape public thinking once more.”

Joshua Gerstler, chartered financial planner at The Orchard Practice, highlights that the stock market does not care who is in power.

“The stock market will continue its long term upwards journey whether it is Conservative, Labour or anyone else in power,” he says.

“There will always be temporary declines, there will always be shocks. But we know this and therefore incorporate this into our financial planning. If you have the right investment strategy in place then you should not need to make major changes in response the election result.”