Doyl Smith, Guest Writer
Analysts have been predicting for months that once the election is over the stock market will rebound.
This suggests that investors discount the market by holding back on buying stocks until a clear political winner is known.
To test this theory to see if it was true or just a market myth, we tracked the weighted average movement of all the prices of stocks on the Jamaica Stock Exchange (JSE) from inception in 1969 – calling it the Jamaica Composite Index – as well as the amount of money that changed hands or market value traded on the JSE.
We then compared the index and market value traded with the year preceding as well as the 24-month period after seven general elections since the JSE was founded. Polls were held in 1972, 1976, 1980, 1989, 1993, 1997 and 2002.
The snap election of 1983 was excluded.
This would have been the eighth election, however. Not only was it two years earlier than it was constitutionally due, but it was called and completed faster than investors could react.
The results of the review were enlightening.
YEAR BEFORE AN ELECTION
The movement of the index in the year prior to an election varied over the period; however, the most significant effect can be seen in the critical indicator of market value traded.
A significant drop-off in trading, of 50 per cent and higher, occurred in the majority of the years (1975, 1979, 1988, and 1996) directly preceding the election.
In short, rather than put new money into the market, investors seem to head to ‘quieter’ pastures prior to the polls until an answer on ‘who will lead the country’ was known.
AFTER THE ELECTION
The returns on the market after an election were the most interesting factor of the study. In the twenty-four month period following a general election, the market has historically done very well, both in upward price movements and, even more importantly, value traded. On average, when the market rose post elections, it went up in excess of 26 per cent, with one of the single largest jumps happening after the 2002 election with a 49 per cent jump in the index and a massive 200 per cent + increase in value traded. The reason for this included several IPO’s coming to market, such as JMMB and Capital and Credit, bringing new money and interest from investors. Several companies have in recent times announced a desire to go public but these plans have been, for various reasons, put on hold. If these IPOs are put back on the agenda it could boost the value and amount of money traded on the exchange.
The market historically does not seem to have a favourite political party.
In almost all cases, no matter which party wins, the market moves from slumber into activity.
In fact, the only two post-election years that the market declined were after 1972 and 1976.
The market has gone up after an election for every period since.
It would seem that it is the uncertainty, rather than the political party, that makes the difference. Take the uncertainty out and the market invariably responds positively. Markets love and thrive on certainty.
The reason for this would include the corporate behaviour of company managers who are far more comfortable investing in their companies in an environment of certainty.
Managers of publicly listed companies will often have projects that are all but ready to be implemented. With some amount of macro-economic ‘certainty’, these companies can move forward, and determine how much, if any, tweaking is required.
Successful corporate projects provide an infusion of profits for shareholders and a lift for stock prices.
The research also provided an interesting look into investor actions both before and after elections.
In most cases, the value of funds traded on the exchange usually slows in the year prior to the election. After the polls, however, no matter who wins, there has historically been a definite rise in prices across the market and in value traded.
While past performance is not a predictor of what will happen in the future, it is often a good indicator of the way events, in this case market activity, may unfold.
Stock watchers know that market psychology has a way of repeating itself.
■ Doyl Smith is a registered investment adviser and corporate relationship manager with JMMB and a Sunday Business guest writer. Email: email@example.com