ELECTIONS: BULL OR BEAR?

6 min readJun 7, 2024

How do elections impact the stock market?

Elections significantly impact the stock market in India due to the uncertainty they introduce, affecting investor sentiment and market stability. Several factors contribute to this:

Uncertainty around future policies: Investors are keen on understanding the political party or coalition coming to power because their policies can significantly impact businesses.
Economic priorities: Will the new government focus on fiscal consolidation, infrastructure spending, or social welfare programs? Each approach can favor different sectors.
Reforms: Will there be a push for privatization, deregulation, or stricter environmental regulations? These can have a positive or negative impact on specific industries.
Sector-specific policies: Some parties might have a history of favoring certain sectors like agriculture, healthcare, or manufacturing. Investors anticipate these potential shifts.
Market Performance Based on Election Outcomes: Historical data shows varied market reactions based on election outcomes. For instance, if the incumbent BJP retains a majority, the market is expected to see positive growth, reflecting confidence in continued economic reforms. On the other hand, a fragmented or weak coalition government could lead to significant market declines due to fears of policy instability and slower economic growth.
Foreign Investor Sentiment: Elections influence foreign investor confidence. A stable government with clear policies can attract foreign investments, boosting market indices. Conversely, political uncertainty and potential policy reversals can deter foreign investors, leading to market downturns.

A Historic Overview of the Impact of Indian General Elections on the Stock Market (2004–2019)

Indian general elections have historically had a significant impact on the stock market, often causing volatility and substantial movements in indices.

2004 Elections

Election Day Return: On May 17, 2004, the Nifty 50 plunged by approximately 12.24%, resulting in a trading halt.

The unexpected victory of the Congress-led UPA over the incumbent BJP-led NDA coalition led to market turmoil. But, Over the next six months, the market recovered as the new government continued with economic reforms, with Nifty gaining about 19%.

2009 Elections

Election Day Return: On May 18, 2009, the Nifty 50 surged by 17.74%, leading to a historic market rally and triggering upper circuit breakers twice in a single day.

The decisive victory of the UPA without the need for leftist support was perceived positively. It suggested political stability and continuity of economic reforms. The bullish sentiment continued, and Nifty rose by nearly 63% over the following six months.

2014 Elections

Election Day Return: On May 16, 2014, Nifty 50 jumped by about 6% during the counting day, closing 0.87% higher after an intraday high of 2.3%.

The landslide victory of the BJP-led NDA, led by Narendra Modi, generated optimism about strong and decisive governance, expected economic reforms, and business-friendly policies. In the long term, the market continued to rise, with Nifty gaining approximately 24% over the next six months.

2019 Elections

Election Day Return: On May 23, 2019, the Nifty 50 rose by 1.60%, reflecting the continuation of the existing government.

The re-election of the Modi government was seen as a mandate for continued economic reforms and political stability, which was favorable for the markets, with a modest gain of around 6% over the subsequent six months.

Inevitable Effects of Election Results on the Stock Market

Short-term Volatility: Elections often lead to heightened volatility due to uncertainty regarding the policy direction of the new government. Investors tend to react strongly to election outcomes, whether favorable or unfavorable.
Political Stability: A clear and decisive mandate generally leads to a positive market reaction, as it implies political stability and continuity in policy-making.
Economic Reforms: Markets favor governments perceived to be pro-business and reform-oriented. The anticipation of economic reforms can lead to a bullish sentiment.
Global and Domestic Factors: While election results significantly impact market movements, global economic conditions and domestic issues such as fiscal policies, inflation, and economic growth also play crucial roles in shaping long-term market trends.

What Influenced Markets in the 2024 Elections?

Exit Poll Predictions

Exit polls can significantly influence markets by creating early optimism or pessimism, leading to artificial volatility. Historical examples, such as the 2004 elections, illustrate this impact. Investors had a close eye on exit poll updates which led to extreme bullish market sentiment before official results were even announced.

The Modi Factor

Prime Minister Narendra Modi’s tenure has been marked by policies that favor the urban middle class, youth, and business communities, driving market confidence. The market’s reaction to Modi’s leadership will be pivotal, reflecting investor confidence in his economic agenda.

Opposition’s Economic Blueprint

The opposition’s stance on economic policies is a crucial factor. Criticism of the BJP’s policies raised questions about the opposition’s alternatives. A robust economic plan addressing key issues could bolster investor confidence. On the other hand, vague promises without a concrete strategy for growth could lead to market instability, as investors seek clarity on the future economic direction.

Tax Policies Impact

Tax policies will be a critical aspect of the elections. Promises to reduce corporate taxes could lead to market rallies by boosting corporate profits and enhancing stock valuations. Conversely, proposals to increase taxes to fund populist schemes might alarm investors, particularly in key sectors like IT, pharmaceuticals, and consumer goods. The market’s response will hinge on the perceived balance between fiscal responsibility and growth incentives.

Prospects for the Indian Economy: Outlook for GDP Growth and Sensex Throughout Election Years

GDP Growth Outlook

Election Year Volatility: Historically, Indian GDP growth has experienced some volatility during election years due to policy uncertainty and shifts in government priorities. However, the overall impact on GDP growth tends to stabilize once the political landscape becomes clear and policies are implemented.
Policy Continuity: A stable and decisive government, particularly under the leadership of Prime Minister Narendra Modi, has historically been associated with continued economic reforms and business-friendly policies. This fosters investor confidence and can support robust GDP growth.
Sectoral Growth: Emphasis on infrastructure development, digital economy initiatives, and manufacturing can drive sectoral growth, contributing to overall GDP expansion. The continuity of Modi’s policies could lead to accelerated growth in these sectors.
Global Economic Conditions: Trade dynamics, interest rates, and commodity prices, will also influence India’s GDP growth. Favorable global conditions can complement domestic policies to enhance growth prospects.
Fiscal Policies: The government’s fiscal policies, including taxation and spending on social welfare and infrastructure, will play a crucial role in shaping GDP growth. Balanced fiscal measures that support growth while maintaining fiscal discipline are essential.

Sensex Outlook

Investor Sentiment: It is significantly influenced by political stability and clarity on economic policies. A clear mandate in the elections, particularly favoring the BJP-led NDA, is likely to boost market confidence, leading to a positive performance of the Sensex in the future.
Market Reactions to Policy Announcements: Announcements related to economic reforms, infrastructure spending, and tax policies will have immediate impacts on the Sensex. Pro-business reforms and policies encouraging foreign investment can drive market rallies.
Historical Trends: Historical data indicates that the Sensex tends to experience sharp movements during election periods but adjusts once the political scenario stabilizes. For example, the post-2014 and 2019 elections saw significant market rallies driven by investor optimism around Modi’s governance.
Foreign Investment: Stable governance and clear economic policies are key to attracting foreign investments. Increased FDI inflows can drive up market indices, including the Sensex. Conversely, political uncertainty can lead to capital outflows and market declines.
Sector-Specific Impacts: Sectors such as banking, infrastructure, IT, and manufacturing may see varied impacts based on specific policies announced by the new government. Positive reforms in these sectors can lead to sectoral stock rallies, influencing overall market performance.

Conclusion

The continuity of Narendra Modi’s leadership is expected to maintain a positive outlook for GDP growth and market performance. Key factors influencing this outlook include political stability, economic reforms, global economic conditions, and investor sentiment. While short-term volatility is inevitable during election periods, the long-term prospects for the Indian economy remain strong, driven by strategic policies and robust governance. Investors should stay informed about policy changes and global conditions to navigate election-induced market fluctuations effectively.