How the UK stock market has historically welcomed a mid-term change in PM (with indifference) and Conservative PMs overall

Russ Mould
24 July 2019

“Students of history will know that Downing Street is named after a famed financial reformer, diplomat and political side-swapper (George Downing) and financial markets are wondering which of these attributes, if any, Boris Johnson will exhibit when he takes office as Prime Minister. History shows that the UK stock market has tended to greet a mid-term change in the nation’s leader with indifference but – over time – it has tended to perform better under Conservative administrations,” says Russ Mould, AJ Bell Investment Director. “That may be why the tiny majority enjoyed by a Johnson Government could, initially at least, be of as much concern as the PM’s plans for policy as the prospect of a General Election would spread more than a few nerves, given the Tories’ recent poor showings in opinion polls.

How the market reacts to mid-term changes in PM

“Since the inception of the FTSE All-Share in 1962, three Prime Ministers have taken office mid-way during a Parliament, following the departure of their predecessor – James Callaghan and Gordon Brown for Labour, in 1976 and 2007, and John Major for the Conservatives in 1990.

“On average, the FTSE All-Share made no immediate progress under the trio during their first 12 months in the hot-seat, rising 2.4% over the first three months of the new PM’s tenure, falling 1.5% over six months and coming in flat over a year.

 

 

FTSE All Share performance after came to office

 

 

3 months

6 months

12 months

Term

James Callaghan

1976-79

(3.3%)

(18.6%)

2.4%

71.8%

John Major

1990-97

11.5%

15.9%

13.9%

107.7%

Gordon Brown

2007-10

(1.1%)

(1.8%)

(16.4%)

(18.2%)

 

 

 

 

 

 

Average

 

2.4%

(1.5%)

(0.0%)

53.8%

Source: Refinitiv data

“This makes it clear that while political stability is welcome, there are many other factors at work when it comes to how the stock market performs and over their full term in office all three encountered hugely different economic circumstances, with the result that the FTSE All-Share provided very different returns.

“Callaghan was battling inflation (which drove investors to real assets and equities as it galloped higher), Major had to confront a recession and the pound’s ejection from the Exchange Rate Mechanism (which turned out to be a bit of a blessing) and Brown got the worst hand of the lot, in the form of the Great Financial Crisis.

“The economy is therefore one factor – and Mr Johnson’s policies could have an impact here, especially with regard to Brexit – while others are corporate profits and cash flows - and the price (or valuation) investors are prepared to pay to access them. It is getting harder to find industries which are not impacted by the long hand of Government or regulation. The May administration took a particularly interventionist stance when it came to gambling, smoking, utility bills and sugary drinks and investors will be waiting to find out whether Mr Johnson will continue with this or take a more laissez-fare approach – stock markets would likely favour the latter.

How the stock market reacts to Conservative governments

“For whatever reason, the UK stock market has tended to do better under Conservative Governments than Labour ones since the launch of the FTSE All-Share in 1962. The perception that they are more pro-business, pro-enterprise and anti-State intervention is as good an explanation as any, although it should be noted that equities have still tended to advance under Labour – they have just done so by less, on average.

“This can be seen by looking at FTSE All-Share performance data across the 10 General Elections and 15 Prime Ministers seen since 1962.

“First, over the full term of the seven governments which followed a Labour election victory the All-Share has risen by an average of 27%, compared to 46% under the eight Conservative administrations.

 

FTSE All-Share performance

 

1 year before poll

1 year after poll

Full Term

Labour

0.4%

4.1%

26.8%

Conservatives

15.8%

7.4%

46.4%

Source: Refinitiv data. *1964 to 1970 counted as one term (including 1966 election) and 1974 1979 counted as one term (including second ballot in 1974)

“Second, of the 10 Prime Ministers to lead the country since the 1964 ballot, four of the best five FTSE All-Share performances by Government have come under the Conservatives and four of the five worst under Labour.

 

 

 

FTSE All Share

Margaret Thatcher

Conservative

1979-1990

270.6%

John Major

Conservative

1990-1997

107.1%

James Callaghan

Labour

1976-1979

66.7%

David Cameron

Conservative

2010-2016

43.2%

Edward Heath

Conservative

1970-1974

21.9%

Tony Blair

Labour

1997-2007

19.9%

Theresa May

Conservative

2016-2019

14.1%

Harold Wilson

Labour

1964-1970

9.0%

Harold Wilson

Labour

1974-1976

8.6%

Gordon Brown

Labour

2007-2010

(19.2%)

Source: Refinitiv data

“That said, the past is no guarantee for the future and even the longest-serving Prime Ministers of modern times have a relatively limited shelf life compared to many companies.

“With a dividend yield of around 4%, the FTSE All-Share can be seen as a 25-year duration bond (as this is how long it would take investors to get their money back, assuming no change in dividends or share prices).

“This shows exactly why shares should be treated as a (very) long-term investment and why the role of short-term politics should not be over-emphasised.

“Very few Prime Ministers have lasted for much more than one full term of office, at least since the inception of the FTSE All-Share in 1964 and Boris Johnson’s wafer-thin Parliamentary majority could be a major obstacle when it comes to implementing his preferred policies. The prospect of a rebellion within his own party cannot be ruled out and as a keen history student Mr Johnson will know that he needs to stay in office until at least 19 February 2020 if he is to outlast the shortest-serving modern Prime Minister, Andrew Bonar Law, who resigned in May 1923 owing to ill-health after just 210 days in 10 Downing Street.

 

Prime Minister

Party

Term in 10 Downing Street

Days

 

 

 

 

 

1

Andrew Bonar Law

Conservative

1922-1923

210

2

Sir Alec Douglas-Home

Conservative

1963-1964

363

3

Earl of Rosebery

Conservative

1895-1895

474

4

Sir Anthony Eden

Conservative

1955-1957

644

5

Henry Campbell Bannerman

Liberal

1905-1908

852

6

Theresa May *

Conservative

2016-2019

1,106

7

Gordon Brown

Labour

2007-2010

1,049

8

Neville Chamberlain

Conservative

1937-1940

1,078

9

James Callaghan

Labour

1976-1979

1,124

10

Arthur Balfour

Conservative

1902-1905

1,241

Source: History Today, www.gov.uk, BBC

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