The Federal Election and Financial Markets

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This weekend really marked the halfway point, and unofficial start of the longest federal election in Canadian history, and while there are a number of issues, you might be curious as to the impact of the parties in the economy. While I have my own thoughts and opinions on which party to support, I’m writing this from the point of view of an investor and not from a partisan angle of any sort. It shouldn’t come as a surprise to anyone that all of the parties will cheerfully tell you that they alone have the best plans for the economy and the other guys are wrong. Who’s telling the truth when we look back at longer term history? Which parties have been best for investors and savers?  Let’s cut through the hyperbole and rhetoric and see what we can learn.  I should note from the outset that this isn’t intended to tell you who to vote for or give credibility to any party or their policies at all; the point here is strictly to gauge a practical path forward for investors and to review some possible impacts.

First I should note that I borrow evidence here from a paper written by Stephane Chretien and Frank Coggins, which can be found in its entirety here and is a really interesting read. I have also gone through and added some of the newer information in this post from my own calculations and research.  While the Chretien/Coggins paper is definitely a starting point for me here I have also added some information here on the various campaign periods which do not factor in on their paper from my own research.   

The paper written by Chretien and Coggins seeks to answer four main questions, and all are equally interesting when we look at the 2015 campaign and period. “First, are financial market returns different between majority and minority governments? Second, are financial market returns different between right-leaning Conservative governments and left-leaning Liberal governments? Third, are financial market returns different between the early part and the late part of the variable term federal mandates? Fourth, are the financial market returns influenced by the American election outcomes?”

The results from their study were really interesting in the context of the current campaign. First we have three parties all within a few percentage points for the three main parties. The polling I’ve seen suggests that the economy is the major topic that voters are focused on at this time as well; hardly a surprise given the talk of recession and significant decline in the price of oil over the past year, let alone the reduction in interest rates and declining value of the Canadian dollar.

In their paper Chretien and Coggins conclude in response to their four questions that:

The difference between majority and minority governments for the financial markets is negligible.  This strikes me as a little bit surprising given the seeming added uncertainty of the minority government, but the evidence shows that this is simply not a factor.
There is no significant difference between the Conservative and Liberal governments of the past. While of course both claim to be better for the economy it’s seemingly not accurate as they tend to be very close to each other in terms of the actual statistics and the financial markets. In fact, the paper examines the risk free rate, stock market returns and inflation.  While there are differences here and there, none are considered significant. Of note, a premium in the stock market for Liberals was also found to be not in effect from 1951-2006, despite earlier evidence to the contrary.  
The only impact that appears for the time in the term and the financial markets is when these events are correlated with the Americans; in other words when our government is early in the term and the Americans are as well, the financial markets appear to perform poorer. When both governments are late in their respective term (and a cynic might note closer to the next election!), the financial markets tend to perform better.
Perhaps unsurprisingly the impacts of the American election outcomes are palpable for our economy. It appears that their outcomes have more impact on our own financial markets than our own in this sense, where the markets do not tend to perform as well when Republicans are elected in the US as when Democrats are in power. While there might be specific relationship reasons why we may see that kind of dichotomy it could well be that the differences between Republicans and Democrats are more pronounced in the US than what we see as the differences between the Liberals and Conservatives in Canada; perhaps the Liberals and Conservatives are both fairly centrist for the most part.  That is beyond the scope of this review though.

So while the longer term impact appears to be somewhat muted on the financial markets, or at least not make  huge difference regardless of who wins the election, we’re going through what is the longest campaign in Canadian history and I thought that the impact of campaigns could be interesting to study.  For this section I looked at the last five campaigns and the starting and finishing point of the TSX over that period.  It should be noted that for the most part these campaigns are 36 days; you shouldn’t expect big moves over that time period. So here are the results over those periods:


Year of Election     TSX Opening Value    TSX Closing Value     Percentage Change

     2000                     10764                         10682                           (0.762)

     2004                       8255                          8468                             2.58

     2006                     10972                         11597                             5.7

     2008                     13160                          9955                            (24.4)

     2011                     14003                         13934                           (0.493)


Source: My own calculations


As you can see from these calculations, the results were widely varied and I don’t think that any correlation can be drawn from it. Certainly nothing in terms of causation looks probable.  In fact when you see the bigger moves in 2006 and 2008 you are essentially seeing the bigger picture in the investment world filtered down in the election period. So when you see the loss of over 24% in 2008, it was right during the time of a lot of tumult and flux in the global market. If anything this serves to underline the data found in the Chretien and Coggins study regarding the impact of the US economy and presidential cycles on our domestic economy. 

While making conclusions based on this review is dangerous and difficult, given that we nearly in the last year of the presidential cycle and currently have a Democrat in the White House, the winner of this election should be off to a favourable start. Because this is purely a historical review though, we cannot use this information to suggest what the economic response might be to the NDP; indeed over the past few decades this appears to be the one period where they are statistically in the race to form government.  So while we can look back and recognize that in terms of the financial markets there are few differences between the Conservatives and Liberals we cannot really make the same determination for the NDP.  Before someone takes issue with this though, that doesn’t mean the outcome would be worse than the other two, or better, purely that it’s not known! Because it appears that the larger impact is the US and their political situation however, one might be wise in thinking that they would have roughly the same impact on the economy as the other two parties. 

Bearing all of this in mind, from an economic standpoint, vote for whoever you like and don't get too warpped up in the economics.  History as a guide, tells us that there isn't much of a difference there, and with the US campaign rolling already we will see more of an issue there anyway.