Change in Prime Minister unlikely to ignite stock market

The FTSE All-Share is up today, as investors weigh up the prospect of a new Prime Minister and hope for greater domestic political stability. However, history suggests it takes more than a new incumbent in 10 Downing Street to really get the stock market going.

Since the inception of the FTSE All-Share in 1964, three Prime Ministers have taken office mid-way through a Parliament – James Callaghan and Gordon Brown for Labour, in 1976 and 2007, and John Major for the Conservatives in 1990.

On average, the FTSE All-Share made no progress at all under the trio during their first 12 months in the hot-seat, rising 2.4% over the first three months of the new PM’s tenure, falling 1.5% over six months and coming in flat over a year.

This makes it clear that while political stability is welcome, there are many other factors at work when it comes to how the stock market performs.

The economy is one but ultimately it is corporate profits and cash flows - and the price (or valuation) investors are prepared to pay to access them - that really dictate how the FTSE All Share will perform.

With a dividend yield of around 4.5%, the FTSE All-Share can be seen as a 22.5-year duration bond (as this is how long it would take investors to get their money back, assuming no change in dividends or share prices).

This shows exactly why shares should be treated as a (very) long-term investment and why the role of short-term politics should not be over-emphasised, as very few Prime Ministers have lasted for much more than one full term of office, at least since the inception of the FTSE All-Share in 1964.

These articles are for information purposes only and are not a personal recommendation or advice.