Updated: Aug 12, 2019
With opposed views on economic policy, the Conservative and Labour parties in the UK have debated for decades the most effective governmental approach to achieve economic objectives. Arguments about the best implementations of fiscal spending, tax rates, national debt, and regulation continue to divide economists and non-economists alike. Many politicians fall into the latter category. The same debates have persisted for decades and continue unresolved mainly because it is difficult to measure the effectiveness of policies because economic objectives can be complex and conflicting, and there is often some time lag or exogenous factor skewing the data.
But what does the stock market think? Does it perform better under conditions set by Conservative governments, or those set by Labour? Figure 1 shows a logarithmic chart of the FT30 index from its inception in 1935 until present-day. Periods where Conservatives were in power are highlighted in blue, and for Labour red.
Over the 84-year period, Conservative stock markets achieved an average of 6.3% annual growth rate. Not bad. Labour, on the other hand, generated a measly 0.067% average annual growth. The data appears to speak for itself: stocks under Conservatives appreciated in value 94 times as much as stocks under Labour. In other words, if you want your pension to make very reasonable return on investment, vote Conservatives; if you want your pension to make a similar return on investment to that obtained by investing in used chewing gum, vote Labour.
Of course, that is an extremely foolish conclusion. It is unreasonable to think that poor stock market performance has been the consequence of policy implemented by various Labour governments. Correlation need not imply causation. Labour’s longest, and most recent, turn behind the wheel happened to span a 13-year period which crammed two global financial crashes into it. It is hardly fair to blame Labour for California’s reckless subprime lending.
Does that mean the disparity between returns under Labour and Conservatives is a coincidence? Possibly. However, it is more likely that there is some third unknown variable which links both stock market performance and governing political party for which a causal relationship exists. Social mood perhaps, as postulated by the Socionomic Theory of Finance. Regardless, the conclusion that can be validly drawn is that historically, the stock market has had a tendency to underperform during periods of Labour governments. That is subtly, but importantly, different from stating that the market underperforms because of Labour governments.