Ballots & Bull Markets: Election & it’s Economic Ripples

Exit polls suggest the BJP is set to return to power, with the BJP-led NDA leading in 295 seats and the Congress-led INDIA bloc ahead in 229 seats. Economists predict the economy will grow at 6.8 percent in FY25, outpacing other major global economies. A third term for the NDA government would ensure continuity, further driving this robust growth.

GDP Growth Projections

The GDP is expected to grow from $3.5 trillion to $7 trillion by 2030, assuming stable circumstances. Experts warn against ignoring long-term elections' impact on the stock market. Election cycles often create market anxiety due to policy uncertainties, affecting both the market and the economy. Understanding the relationship between election results and stock market performance is crucial for investors' long-term outlook.

Pre-Election Volatility

National elections can introduce economic uncertainty. Investors, wary of policy changes, often exhibit risk aversion, leading to pre-election market volatility. Empirical evidence suggests a rise in market volatility before elections, followed by a decline as the political landscape clarifies. The 2008 financial crisis is a notable exception, highlighting broader macroeconomic factors' influence on market stability.

Election Day Market Response

Paradoxically, election day itself often sees muted market activity as investors digest incoming results. This pattern aligns with observed pre-election volatility followed by a post-result cooling-off period. Landslide victories often correlate with short-term market gains due to investor preference for policy predictability. However, these gains are typically short-lived. Periods of political instability negatively impact the equity market, as seen between 1996 and 1998 in India. When governments struggle with reforms due to coalition constraints, markets react negatively, and investors become cautious.

Long-Term Influence of Elections

While elections attract attention, their long-term influence on the equity market is modest. Data shows a weak correlation between election results and long-term stock performance, emphasizing the broader range of factors influencing market dynamics.

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