How Are Stocks Affected by General Elections
Stock markets are highly volatile and significantly influenced by both domestic and international events. Elections are major events that impact a nation's economic, political and social development.
Stock markets experience significant movements, both upward and downward, during the election season. The 2024 general elections have been no exception, with political factors and new government agendas driving market movements.
Read this blog to understand how elections affect the stock market in India.
Impact of General Elections on the Stock Market
Stock markets experience volatility during elections. This is because of the uncertainty that elections bring in their wake.
After an election, if a new government comes to power, it can lead to changes in policies, which could affect the markets and economic sectors in the country.
It is generally believed that if the current administration wins, the stock market will rise due to perceived political stability. However, there are many other reasons why elections impact the stock market so heavily.
For instance, if a party that is seen as business-friendly wins the election, sectors such as infrastructure, manufacturing, and banking could benefit from their policies and incentives. Alternatively, regulations in sectors like alcohol, tobacco, or polluting industries could get stricter.
Companies | Type | Bidding Dates | |
| SME | Closes Today | ||
| Regular | Closes Today | ||
| SME | Closes 17 Jan | ||
| SME | Closes 17 Jan | ||
| SME | Closes 20 Jan |
Factors Determining the Relationship Between Elections and Stock Markets
The following are the different factors that determine the connection between elections and stock markets:
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Election Manifesto
An election manifesto is a collection of social, economic, and environmental policies that political parties promise to implement if they win the election.
Understanding the election manifesto is key to grasping the link between elections and stock markets. If a party's manifesto includes policies aimed at boosting economic growth, such as tax cuts and development initiatives, it can positively influence investor sentiment and stock prices.
For example, promises of tax reductions and a focus on economic progress can lead to a rise in stock prices if that party wins.
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Government Ideology
The ideology of the ruling party is crucial. A party with a strong economic growth strategy can boost market confidence, leading to higher share prices. Conversely, a party with a vague or conflicting agenda can negatively affect market sentiment, causing share prices to fall.
▶️ Also Read - Impact of Elections on the Indian Economic Market: History So Far
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Economic Policies
Expected economic policies also play a role. If the winning party is likely to implement policies that support growth and development, it can lead to an upward trend in the stock market.
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Leader’s Personality and Popularity
A leader’s personality and popularity can impact the stock market significantly. A charismatic and influential leader can attract more foreign investment, generate positive market sentiment, and drive up stock prices.
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Industry and Sector Growth
The uncertainty before and after elections affects not just the overall market but specific industries as well. Suppose the winning party focuses on infrastructure development, the stocks of real estate sectors and infrastructure may rise.
On the other hand, policies that impact the pharmaceutical sector negatively could lead to a drop in pharmaceutical stock prices.
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Exit Polls
Exit polls, which are conducted before official election results are announced, try to predict which party might win the election. If it suggests a party with favourable economic policies is set to win, then stock prices may rise due to increased investor confidence. Similarly, when the current ruling party gets support from the exit poll, it indicates political stability, which could also boost stock prices.
The Bottom Line
General elections affect the stock market significantly and impact stock prices due to the uncertainty they bring. The effect of election outcomes on the stock market highlights the complex relationship between politics and economic sentiment.
Although short-term fluctuations are expected, the long-term direction of the market relies heavily on the policies and stability of the elected government. It is crucial for investors to grasp these dynamics and prepare themselves for different scenarios to manage the electoral cycle effectively.