The Indian economy and the stock market has always been a subject of great fascination, not only for financial enthusiasts but also for politicians, policymakers and bureaucrats. It’s often believed that electoral results, and the power centres that be, play a significant role in influencing the economy and the stock market’s performance. However, an interesting article by Arvind Chari of Quantum Advisors, delves deeper into the historical data between 1990 and 2019,concludes that the Indian stock market’s performance is not as closely linked to electoral results as commonly believed. One could go a step further and suggest that the Indian economy itself is a juggernaut driven by the country’s entrepreneurs, workforce and the people’s immense creativity and productivity, all together marginalising the effects of policy or regulatory missteps or changes in direction made by the government and politicians who may of course be acting with the right intentions.
It is a common belief that election results have a significant impact on the stock market. The argument is often based on the assumption that political stability or instability can directly influence investor sentiment. The idea is that a stable government can lead to favourable policies and regulations, which, in turn, can boost investor confidence and stock market performance.
To examine the purported link between electoral results and the Indian stock market, Arvind Chari conducted a comprehensive analysis using historical data from 1980 to 2023. His data included the results of parliamentary elections and the performance of the S&P BSE Sensex Chari had also conducted a study on this in 2004, which he repeated in 2023. In his article in the Mint, he said, “India’s GDP growth and market returns are uncorrelated with the government in power, Indian corporates are used to this loud and messy democracy, and any market correction due to just a change in government is a buying opportunity.”
Surprisingly, Chari’s analysis did not reveal any clear correlation between electoral results and the stock market’s performance.
Performance during Election Years: Contrary to popular belief, stock market performance during election years was not significantly different from non-election years. In some instances, the market performed better during election years, while in others, it did worse. This inconsistency suggests that electoral results alone do not drive market sentiment.
Government Stability: While it is often argued that political stability is crucial for market performance, the data did not support this claim. There were instances of market rallies under coalition governments and declines under single-party rule. Market sentiment appears to be influenced by a myriad of factors, including economic conditions, global events, and corporate performance.
Post-Election Trends: Another interesting observation was that the immediate post-election period did not necessarily witness a significant market movement. Market reactions seemed to be more gradual and were influenced by factors other than just election outcomes.
Global Factors: The global economic environment played a vital role in shaping the Indian stock market’s performance during this period. Events such as the 2008 global financial crisis and the dot-com bubble burst had more profound effects on the market than electoral results.
While electoral results undoubtedly have an impact on policy direction, it is essential to recognize that the Indian stock market is deeply intertwined with economic fundamentals. Factors such as GDP growth, inflation, interest rates, and corporate earnings have a more immediate and significant influence on stock prices than electoral outcomes.
Investor behaviour is another critical factor that shapes stock market performance. Investors often react emotionally to political events, leading to short-term fluctuations. However, long-term investors tend to focus on the fundamental health of the economy and individual companies, which ultimately drive market trends.
While political stability and government policies can have an impact on market sentiment, they are just one of many factors that influence stock prices, and that too in the short term. In the long term, it is the economy itself and the profitability of Indian corporations that ultimately drives stock prices.
The main takeaway from Mr. Chari’s work should be that India’s entrepreneurs as a whole are a much more potent force and vector for long term economic, and therefore financial, growth and success, than policymakers and governments.