General Elections 2015 – Will Going to the Polls Cause the STI to Rise?

Screen shot 2015-07-28 at PM 10.17.36

29 Jul General Elections 2015 – Will Going to the Polls Cause the STI to Rise?

Prime Minister Lee Hsien Loong announced last Friday that the Electoral Boundaries Review Committee (EBRC) has submitted its report to the Government on proposed electoral changes. The government has since accepted the report. It is the surest sign that General Elections are around the corner.

Over the weekend, a friend remarked that this is the best time to buy stocks. The government will do everything they can to win the elections, he insisted. And they will definitely ensure that the stock market rallies just before the elections so that they can capture the votes of retail investors.

Impeccable logic but is that really the case?

It was a casual remark but I was curious and decided to look at some data to verify if it is indeed the case. Specifically, here are some hypotheses that I would like to test out.

We know that trying to pick stocks can be very frustrating. Skip that frustration, get 21 ideas to finding profitable stocks in an instant. 

1. If my friend is right, from the time the EBRC releases its report (effectively now) to signal an impending election until polling day, the stock market will rise.
2. If #1 is indeed happening, we can extend the logic further. The government would want to ensure that the stock market is kept healthy for the entire year before the elections. Hence, #2 is to state that it will be a rising market in the year prior to any GE.
3. The performance of the stock market has a bearing on how well the ruling party does.

For a start, here is an overview of the past four General Elections in relation to the stock market.

GE Overview

Straits Times Index 1995 – 2015

On first glance, there seems to be no discernible pattern as to when the Elections are called with regard to market cycle. Let’s dig deeper

In 2011, the global economy was recovering from the Global Financial Crisis. Against the backdrop of the Quantitative Program by the US Federal Reserve, large amounts of capital flowed into the Singapore financial system. Singapore stocks (and properties) had a good run. Polling day for GE 2011 was on 7th May. For the year leading up, the stock market trotted at a steady pace and gained 7%. From the day the EBRC released their report in Feb till polling day itself in May, it even managed a 4% increase.

GE 2011

Straits Times Index May 2010 – May 2011

With the benefit of hindsight, we all know that the subprime crisis and the collapse of Lehman bought the entire global economy to its knees in 2008. Prior to that however, the markets were bullish to the max. For the year leading up to GE 2006, the STI was on a seemingly unstoppable climb, clocking up an impressive 21% gain. In the last two months leading up the polling day, the gain was almost 6%.

GE 2006

Straits Times Index May 2005 – May 2006

2001 was a different story altogether. The turn of the century saw the busting of the dot com  bubble in the US. Asia and the STI was not spared. The Singapore market dropped by a third in the run up to GE 2001. In the barely three weeks from when the report was released till polling day, the STI gave up yet another 6%.

Then Prime Minister Goh Chok Tong acknowledged that the elections were originally planned for 2002, but called for a snap election in the face of a gloomy economic outlook. It turned out to be a brilliant political move, with the PAP capturing its highest ever share of votes.

GE 2001

Straits Times Index Nov 2000 – Nov 2001

And in 1997, the STI remained flat from the day the EBRC released the report till polling day. The year before saw the index drop 6%.

GE 1997

Straits Times Index Jan 1996 – Jan 1997

 Hypothesis 1 – Will an impending Election bring about a stock market rally? 

For the past four GEs, from the time the EBRC releases its report till polling day, the STI has risen on two occasions (2011 and 2007), it has posted a decline on one (2001) and has remained flat on the last (1997). Looking at the charts above, these movements remained largely in line with the prevailing market trends at that point in time.

Based on data from the past four GEs, I would be reluctant to bet on the stock market rallying pre election. I would be even more skeptical of any claims that the stock market will be propped up to keep retail investors happy in order to buy their votes.

Does the STI rise in the year leading up to the GE?

If there is a clear and present relationship between a bull market and the timing of the GEs, it could mean two things. It could mean either the government chooses to call for a GE in a rising market, or that there is some form of intervention to ensure that market sentiment remains healthy.

The verdict is just as vague on this one. Out of the four General Elections we looked at, half of them saw a run up in the STI (7% and 21%) in the year prior to the GE. The other two General Elections actually saw the stock market declining (-34% and -6%). It was a very even match.

Taken in this sense, I would say that timings for General Elections is pretty independent of the stock market performance.

Hypothesis 3 – The direction of the stock market has a bearing on how well the ruling party does

Now, if it is indeed the case that the timing of the GE has no bearing on the stock market whatsoever, let us turn the situation around and ask the question in a different manner – Will a rising or falling market benefit the ruling party more?

Here are some figures to consider

Screen shot 2015-07-29 at AM 11.01.26

Once again, there is nothing conclusive to be drawn from the numbers. A rising market or a flat market seem to have little effect on election results. In the only occasion where markets took a massive tumble in 2001, the PAP’s vote share spiked to 75%, its best showing in many decades.

One possible explanation for that is that the population think of it as a risk on risk off scenario. During times of economic stability, the level of perceived risk is low. Voters are well accounted for financially. Without having to worry about bread and butter issues, their concerns shift to higher level societal needs – balanced political representation, freedom of press, higher levels of accountability. With that, they tend to take riskier decisions at the ballot box, sending more votes the opposition way.

In times of crisis, with the economy and their livelihood at stake, the votes take flight to safety with the tried and tested. They keep faith with the ruling party and hence the PAP ended up outperforming massively.

Two Caveats

I would like to end with two caveats. Firstly, there is no rigorous statistical study done to arrive at the conclusions drawn. I practically eyeballed the numbers available, and four sets of numbers is far from a complete dataset. I also picked the one year time frame randomly. If anyone has done a more in-depth study, please point me towards it, I would be very interested to find out.

Secondly, correlation is not causation. An ice-cream seller would notice that as the skirts of ladies get shorter, the sale of his ice-cream increases. It is inviting to claim that it is his ice-cream that is causing ladies to wear shorter skirts, or that skimpily dressed ladies prefer ice-cream. The truth is neither. Both an increase in ice-cream sales and skirt length could be caused by a third factor – the hot weather.

Hence, even if the data shows that there is a perfect relationship (which there is not) between stock market performance and election timings/results, we can at most claim that they are correlated. There could very well be a third or even a multitude of other factors involved. To prove that one is causing the other is a much larger task indeed.

In investigating investments opportunities, evaluating past results, studying the financial markets and trying to figure out what they will do next, investors will do very well to always bear this in mind – Correlation is not causation!

GE 2015 and the STI

Straits Times Index Jul 2014 – Jul 2015

Finally, here is how the STI has fared over the past one year up till today. We are at exactly almost where we started off from. How will GE 2015 turn out? Your guess is as good as mine.

Happy Voting!



---------

Grant Yourself The Ability To Make 10 - 15 % Returns Annually. Lifetime Access. Learn at your convenience. Bag stock market profits with ease: Access Now!


New to investing and could use some free and useful guides? Check out: "How to start investing in Singapore"

No Comments

Post A Comment

Another popup!? 

We Are Sorry! But WAIT...

Since you are already reading, why not read on? You are probably reading an article on this site because you are interested in investing and personal finance.

 

If that's true, this value packed ebook, "Investing Your First $20,000" would definitely help you.

 

Simply enter your email below and we will send you the ebook plus insightful finance articles just like the one you were reading before this popup - right to your inbox. No more popups!

 

Try it. You can unsubscribe any time.

Good Job!

Thank You For Your Time

Do check your email for the ebook!