Much has been discussed as of late about the elections that are happening across the globe, most notably in France and Germany. Recently, Theresa May, the Prime Minister of the U.K., figured they’d get in on the action. She called for a snap election to happen on June 8th. Why not add to the political headlines of the world?
Depending upon perspective, you can look at this election in a few ways:
- A Power Grab – Prime Minster May has very favorable ratings right now and is predicted to have a 20 point lead in any election. She may be capitalizing on this favorable position to grow her power both in magnitude and in length. Doing so extends the time to the next election from three years to five.
- A Stronger and Smoother Position – May is betting she can increase the representation of her Conservative Party within the House of Commons. In turn, she can gain more traction for a smooth, rather than abrupt, exit from the EU. Currently her Conservative Party holds a 17 seat lead in the 650 seat House. Some predict they could gain 100 seats. A strong win for May could also give negotiators on the other side in Brussels more confidence that she would be able to execute on not just popular, but potentially unpopular measures that result from the Brexit negotiations.
- A Move for Long-Term Stability – In March, the U.K. invoked Article 50, the clause that allows them to exit the EU. This brings about a two year negotiating window. After the negotiations, the actual execution on the transition out of the EU could start and take some time. If the current election cycle were left intact, they’d pop up right in the middle of the transition in 2020. From Prime Minister May’s perspective, that leaves things ripe for instability which is avoided by accelerating the elections.
Immediate reactions to the snap election were overwhelmingly positive and a May victory is being touted as a near certainty. However, anytime an election is involved, there is potential for disruption to occur since no outcome is guaranteed. We can look over the past nearly ten months at several political events that have happened – Brexit, the U.S. elections, the first round of the French elections, and more. We have to remember a very powerful behavioral bias in finance, and that’s hindsight bias. When we look back at the knowns, like voting outcomes and market performance, we often tie the two ideas together; the market did this because of that. However, while a story resonates in our heads about why something happened, it doesn’t always paint the full picture about what the true cause of the event was. This is why you can have a headline today say “Market up on Fed raising rates,” one day followed by “Market down on Fed raising rates,” the very next day.
In reality, elections, as important as they are, aren’t the economic engine of the markets and won’t be the full reason why markets do poorly, wonderfully, or average over the coming years. The markets are far more vast and decentralized than that. The true engine of the markets has always, and will always find a way to chug along regardless of elections across the globe. While May’s election announcement is an interesting development, it’s not a development that causes alarm or a need to change strategy.