Every time a general election comes around in India, the same conversation starts. Someone at a family gathering explains which result the market wants, someone else disagrees, and a third person announces they are staying out until the counting is done.
It is a reasonable-sounding instinct. A national election is the biggest visible event on the calendar, so it feels as though it must be the biggest thing happening to share prices. The historical record points the other way.
This post was first written in early 2019, ahead of the Lok Sabha election that year. Everything below is history — what happened on particular dates in the past — and not a prediction about any election.
The market does react, and the reaction is loud
Three past results show how sharp the immediate move can be.
- 2004. The incumbent NDA government lost unexpectedly. On the first full trading day after the result, 17 May 2004, the Sensex fell roughly 11%. Trading was halted more than once that day.
- 2009. The UPA returned with a much stronger mandate than expected. On the first trading day after that result, in May 2009, the Sensex rose about 17% and trading was halted almost immediately. It remains one of the single largest one-day moves in the index's history.
- 2014. The move came largely before the result rather than after it. Through the year running up to the May 2014 election, as a decisive outcome came to be expected, the index rose strongly and then did comparatively little on the day itself.
So yes, elections move markets. If the argument stopped there, the case for waiting until the result is out would look sensible.
What happened next is the part nobody quotes
Follow each episode forward by a few years and something awkward happens to the story.
The years after 2004 — the result the market apparently hated — turned out to be one of the strongest stretches the Indian market has had. The years after 2009 — the result it apparently loved — were flat and frustrating by comparison. The years after 2014 were middling, well short of the enthusiasm that preceded them.
In two of the three cases the day-one verdict pointed the opposite way to what followed. In the third it pointed the right way and overstated it.
But the more useful observation is what those stretches had in common with the elections that opened them, which is almost nothing.
The strong run after 2004 sat inside a global boom — worldwide growth, a commodity upcycle, credit expanding everywhere — and markets in countries holding no election at all rose in that period too. The disappointing run after 2009 sat inside the long hangover from the global financial crisis and then the euro-zone debt crisis, alongside stubborn domestic inflation and rising interest rates. The middling years after 2014 coincided with a slump in global commodity prices and weak corporate earnings at home.
In other words, the thing that best explains each of those periods is not the election that began it. It is what was happening to the world economy and to company profits over the years that followed — most of which was already in motion, and none of which anybody could read off the result on counting day.
Why the day-one reaction ages badly
A single day's move is a reaction to a change in expectations, not to a change in anything a company actually does. On the morning after a result, nothing has yet been produced, sold, invoiced or collected differently. What has changed is the story people are telling themselves about the years ahead.
Over the following years, that story gets tested against what companies actually earn — and earnings are shaped by demand, input costs, interest rates, currency, competition and how individual managements execute. Politics sits somewhere on that list. It is not the whole list, and it is rarely the largest item on it.
The election-day reaction is a snap judgement about that entire list, made in a few hours, by people who cannot see the next three years any better than you can.
What this is and is not saying
It is not saying politics does not matter. Policy affects taxation, regulation, public spending and the cost of doing business, and those show up in company accounts over years.
It is saying something narrower: that the loud, immediate reaction to a result has historically been a poor guide to the period that followed.
If a coming event is genuinely making you reconsider, the useful question is usually not "what will the result be?" It is "why is my plan built so that a single event can knock it over?" That second question you can actually answer, and unlike the first one, the answer does not depend on guessing.
This article is general information for education only. It is not investment advice and does not take account of your circumstances. Investments in securities are subject to market risks; please read all related documents carefully before investing.
