Stock Market and General Elections [Impact Analysis]

General elections in India are pivotal events that shapes the country’s political landscape. Loksabha elections play a crucial role in determining the direction of India’s governance and policy decisions. They have significant impact for its economy, including the stock market. The new government formed after the elections takes decisions on the regulatory rules, monetary policies, fiscal policies, government spendings, etc. These decisions have a clear impact on the business and in turn on the stock market.Stock investors closely monitor the electoral process and its outcomes. Hence, understanding the dynamics between politics and stock market performance can be interesting. In this article, we delve deep into the impact of general elections on the Indian stock market.For example, in 2019 general elections BJP secured a decisive victory. After the elections, in September 2019, the government reduced the corporate tax rates. Tax rate for domestic companies was reduced from 22% from the previous 30%. For new manufacturing companies, the rate was reduced to 15% from 25%.This move to lower corporate tax rates was widely celebrated by businesses and stock market alike. The announcement had an immediate impact on the stock market, with Sensex and Nifty witnessing a sharp rally. Stock prices surged across various sectors, especially ones in the manufacturing, infrastructure, and banking space.Similarly, in 2008, in the wake of the global financial crisis, the UPA government announced a fiscal stimulus package to stimulate domestic demand. As part of the stimulus package, the government introduced increased spending on infrastructure projects, tax cuts for certain industries, and enhanced credit availability for businesses. The positive impact of the fiscal stimulus package was visible in the Sensex and Nifty’s rallies.Topics:Point #1: Historical PerspectiveOver the years, general elections in India have been associated with heightened volatility in the stock market. Historical data proves that the stock market fluctuates around the election season. It is particularly more prevalent in periods leading up to the weeks when voting takes place. The uncertainty surrounding the election outcome, coupled with anticipation of potential policy changes often triggers market reactions.Let’s site a few examples of how the market behaves during a general election season.2009 General ElectionsThe 2009 general elections were held in India from April 16 to May 13. During this period, the Nifty and Sensex exhibited non-standard volatility.The Sensex closed at around 11,732 points on April 16, 2009 and fluctuated during the election period. By May 13, 2009, when the elections concluded, the Sensex was around 12,173 points. Before the general elections, between Jan’2009 and Apr’2009, the Sensex was hovering around 9000 levels.As the votings proceeded, between April and May, there was a small rally. The Sensex eventually crossed the 12,000 levels. As the elections got over and results were declared on 16-May-2009, the Sensex broke the shackles. It climbed to 17,800 points by end of the year 2010.It is also essential to note that this period (2009 to 2010) was post financial crisis phase and Sensex was just past its bottom. The jump from 12,000 to 17,000 (40% up) seen post elections was not only the election results euphoria.2014 General ElectionsAt the beginning of January 2014, the Sensex was around 21,140 points. Between Jan and March, Sensex exhibited moderate fluctuations but remained relatively stable. It reflected cautious investor sentiment ahead of the elections. By the end of March 2014, the Sensex had risen to approximately 22,386 points. It was driven by optimism regarding the potential outcome of the elections and expectations of economic reforms.In April 2014 (Pre-election period), as election dates approached, the Sensex experienced increased volatility. On an average, the Sensex remained at 21,700 levels before the voting started though the trend was upwards only.During Voting (April and May)Between April 7 to May 12 , saw significant fluctuations as different phases of elections took place across the country. On April 7, 2014, the Sensex stood at approximately 22,343 points. Market movements during this period were characterized by investor reactions to polling data and political developments. By May 12, 2014, the last day of voting, the Sensex had risen to about 23,551 points, reflecting growing optimism about a stable government.After Election Results:The election results were announced on May 16, 2014, BJP securing a decisive victory. On May 16, the Sensex surged by a record 1,470 points to close at around 24,121 points, a historic high driven by positive investor sentiment regarding the election outcome.Following the initial surge, the Sensex continued to perform strongly, driven by expectations of economic reforms and pro-business policies. The Sensex crossed the 25,000 mark for the first time on May 26, 2014, the day the new Prime Minister was sworn in.The Sensex maintained its upward trajectory in the following months. It reached an all-time high of 28,822 points on November 28, 2014. The surge was supported by strong FII inflows and positive economic data.Suggested Reading: Stock Market & Macroeconomy Correlation.2019 General ElectionsAt the beginning of January 2019, the Sensex was around 36,068 points. During January and February, the market experienced moderate fluctuations. It was influenced by domestic and global economic factors. The concerns were related to slowing economic growth and trade tensions.By the end of February 2019, the Sensex had risen to about 36,063 points, indicating cautious investor sentiment ahead of the elections.In March, the Sensex started gaining momentum. The optimism about a stable government grew. The Balakot air strike happened on 26-Feb’2019. On March 29, 2019, the Sensex closed at approximately 38,673 points. It was a strong pre-election rally driven by expectations of policy continuity.The Sensex continued its upward trend in early April. On April 1, 2019, the Sensex stood at around 38,871 points. By April 10, just before the voting started, the Sensex reached approximately 38,585 points.During Voting (April and May)The voting period saw the Sensex experiencing significant volatility as different phases of elections took place. On April 11, 2019, the first day of voting, the Sensex was around 38,607 points. The market responded to various opinion polls and political developments throughout the voting period. Despite some fluctuations, the Sensex showed resilience. By May 17, 2019, just before the election results, the Sensex closed at about 37,930 points.The election results were announced on May 23, 2019. It confirmed a decisive victory for the incumbent BJP-led coalition. On May 23, the Sensex surged by 623 points to close at around 38,989 points.After Election ResultsIn June 2019, the Sensex touched the 40,000 mark for the very first time. Following this initial surge, the Sensex experienced some volatility. In Oct 2019, the Sensex fell to 34,500 levels. It was caused by slow GDP growth rate, IL&FS collapse, fiscal deficit concerns, trade tensions between China and USA, rising bank NPAs etc.In the latter half of the year, between October and December 2019, the Sensex regained its upward momentum. In December 2019, the Sensex touched the all time high of 41,600 levels.Point #2: Factors Influencing the Stock Market During ElectionsDuring elections, the stock market often experiences significant fluctuations influenced by political stability, economic policies, and market sentiment. Understanding these factors can help investors make informed decisions. Let’s explore how each of these elements impacts investor confidence and market behavior during election periods.2.1 Political StabilityPolitical stability plays a crucial role in the stock market. When a government is stable, investors feel more confident. They believe policies will remain consistent. For example, after the 2014 general elections in India, the BJP’s strong mandate led to a sense of political stability. This resulted in the Sensex rising by over 25% within a year.Conversely, political instability creates uncertainty. Investors fear sudden policy changes. For instance, during the 2004 elections, the unexpected victory of a coalition led by the Congress party caused the Sensex to drop by nearly 12% in a single day. This drop was due to the unexpected outcome of the elections.But the market has the tendency to adapt to the change and continue following its long-term trend.2.3 Economic PoliciesEconomic policies of a new government can greatly impact the stock market. Investors look for pro-business policies. When they expect tax cuts or incentives, they buy more stocks. For instance, in 2019, the BJP promised tax cuts and increased spending on infrastructure. This led to a positive market reaction. The Sensex gained nearly 1,000 points the day after the election results.On the other hand, if a government hints at higher taxes or restrictive regulations, investors may sell their stocks. This happened in 2009 when fears of higher taxes led to market fluctuations even though the Congress party won.2.4 Market SentimentMarket sentiment refers to the overall attitude of investors towards the market. During elections, sentiment can swing wildly. Positive sentiment occurs when investors believe the winning party will boost the economy. For example, in 2014, the election of Narendra Modi sparked optimism due to his business-friendly image. The market soared in response.Negative sentiment happens when investors worry about political instability or unfavourable policies. This was evident in 2004 when the surprise election results led to panic selling. Understanding market sentiment is key for new investors. It helps in predicting short-term market movements during election periods.By keeping an eye on political stability, economic policies, and market sentiment, even beginners can better navigate the stock market during elections.Point #3. Statistical AnalysisStatistical analysis during elections helps investors understand market behavior by examining key indices, sector performance, and volatility metrics. This section explores how the BSE Sensex and NSE Nifty perform before, during, and after elections, highlights sectoral winners and losers, and discusses changes in market volatility using the VIX.3.1 Market Indices & Election ImpactIn the below table you’ll find Sensex data for the last 6 General Election years in India (1996, 1999, 2004, 2009, 2014, and 2019).YearYear StartElection StartElection EndYear EndYr-19963,1003,7003,8003,085Yr-19993,4004,7504,7005,000Yr-20046,0255,8004,9506,035Yr-20099,32511,30012,20016,800Yr-201420,86022,34323,50027,500Yr-201936,20038,60039,30041,200The 2014 Indian general elections provide a compelling case study of how elections can impact market indices. Before the elections, the BSE Sensex, was relatively stable, trading around 20,800 points. The narrative was so set that the political landscape is filled with uncertainty. Hence, the investors were also cautious, awaiting the election outcome.As the elections approached and exit polls started predicting a strong victory for the BJP investor confidence began to build. Back then, the party was largely perceived as pro-business.Post-Election SurgeAfter the BJP’s decisive victory, the Sensex experienced a significant rally. By the end of the year 2019, Sensex was at 27,500 points, marking a gain of over 25%. This dramatic rise was driven by renewed investor optimism, under the new stable government.3.2 Sectoral PerformanceDifferent sectors react differently during election times. Typically, sectors like infrastructure, banking, and consumer goods perform well if investors expect pro-business policies from the new government.For example, in the 2019 elections, the infrastructure sector saw significant gains. The Nifty Infrastructure index rose by 10% in the month following the BJP’s re-election.On the other hand, sectors like healthcare and utilities may not experience the same level of optimism. On can even see declines if policies are expected to favor other industries.Post the 2019 elections, PSU stocks have performed like we’ve not seen them perform in the last two-three decades. The S&P BSE PSU Index grew at 21.7% per annum in the last 5 years.3.3 Volatility Index (VIX)Market volatility often increase during crisis and election periods. The Volatility Index (VIX), also known as the “fear gauge,” measures the uncertainty. Higher VIX values indicate more market volatility.Let’s see a few VIX data examples:2008-09 Financial Crisis: The VIX rose to 85 Levels (October 2008)2009 General Elections: The VIX spiked from around 30 to nearly 50 due to uncertainty about the election outcome. This increased volatility can result in larger price swings for stocks.2014 General Elections: In early 2014, the Nifty VIX was at 18-20. As election dates approached (April-May), the Nifty VIX saw some spikes, reaching levels of 30 due to uncertainty and anticipation. Following the BJP’s victory in May 2014, the Nifty VIX dropped significantly. It fell to around 15-16 shortly after the results.2019 General Elections: At the beginning of 2019, the Nifty VIX was around 15-17. During the election period (April-May 2019), the VIX experienced increased volatility, peaking at around 23. After the BJP’s re-election in May 2019, the Nifty VIX decreased, dropping to around 18-19.2020 Covid Crash: In early 2020, before the pandemic’s full impact, the Nifty VIX was relatively low, hovering around 14-16. As the COVID-19 pandemic escalated in March 2020, the Nifty VIX surged dramatically, reaching the high of 80 caused by panic selling.2024 General Election: Currently in May 2024, Nifty VIX is around 15 levels. Before April, it was hovering in the range of 10-12.ConclusionElections have a significant impact on India’s stock market. Political stability, economic policies, and market sentiment drive these changes. For instance, after the 2014 and 2019 elections, pro-business policies led to substantial market rallies. Conversely, unexpected outcomes can cause volatility, as seen in 2004.Statistical data reinforces this connection. Key indices like the Sensex and Nifty often rise or fall based on election outcomes. Sector performance varies, with infrastructure and banking typically benefiting from pro-business governments. Volatility metrics like the VIX also spike during elections, reflecting market uncertainty.Understanding these dynamics helps investors navigate the market better during election periods. By staying informed, even beginners can make more confident investment decisions and manage risks effectively.Suggested Reading: