From the economy-bending policies of Donald Trump’s second term, to the growing strength of the far right in Europe, the new alliance between Russia and the United States, the wars in Ukraine and the Middle East, and the US President’s vow to upturn world trade rules – the markets are certainly navigating tricky times.
In recent months, we’ve seen volatility in some areas, while others show cautious optimism, reflecting the close relationship between politics and markets.
Of course, economic policies, laws and regulations – such as tax changes, new business regulations or referendums – significantly influence how investors allocate their portfolios and that ultimately impacts overall market performance.
In 2016, when the United Kingdom voted to leave the European Union, the UK pound plunged and more than US$2 trillion was wiped off global equity markets.
In the following four years until Brexit was finally achieved in 2020, the Financial Times Stock Exchange 100 performed poorly compared to other markets as domestic and international investors looked at investing elsewhere to avoid risk. While it has risen since a significant drop during the coronavirus pandemic, the exodus of companies from the London Stock Exchange continues with almost 90 departures in 2024.
Fluctuations in interest rates and any hint of political instability can also trigger a sell-off or a rally in prices, leading companies to postpone capital investment and causing economic growth to slow.
Global oil prices rose 30 per cent in 2022 when Russia invaded Ukraine causing European stock markets to plunge 4 per cent in a single day. Since then, oil prices have fluctuated and are now back to pre-war levels. Gold has also reached new heights as investors globally look for a safe haven from high geopolitical risks.
Do elections have an effect?
Elections, which almost always cause market disruptions during the uncertainty of the campaign period and shortly after the vote is known, have featured strongly in the past six months or so.
A review of 75 years of US market data has found that, while there may be outbursts of volatility in the lead-up to the vote, there’s minimal impact on financial market performance in the medium to long term. The data shows that market returns are typically more dependent on economic and inflation trends rather than election results.
Nonetheless, the lively 2024 US Presidential campaign has had a rollercoaster effect on the markets. We felt the ups and downs as the Democrats faced turmoil and Kamala Harris was nominated as their candidate. Donald Trump’s various policy announcements on taxes, immigration, government cost cutting and tariffs had a direct impact on us, sometimes lifting our spirits as investors and other times causing concern.
An analysis by Macquarie University researchers of the three days before and after election day found significant abnormal returns in US equities immediately after the vote.
But the surge was short-lived as investor sentiment fluctuated. Small cap equities with more domestic exposure experienced the highest returns while the energy sector also saw substantial gains, in anticipation of regulatory changes.
While currently the S&P500 and the Nasdaq have both gained overall since the election, there’s been extreme share price volatility.
How Australia has fared
Meanwhile, any impact on markets ahead of Australia’s upcoming federal election has so far been muted thanks to the volume of world events.
The on-again off-again US tariffs are causing more concern here for both policymakers and investors. Tariffs on our exports could mean higher prices and a drop in demand for our goods and services, leading to economic uncertainty.
In early February, the Australian share market took a dive immediately after President Trump’s announcement of tariffs on Mexico, Canada and China, clearing around $50 billion from the ASX 200. They recovered slightly only to fall again later as the Reserve Bank cut interest rates. In the US, some tech companies delayed or cancelled their listing plans because of the volatility and uncertainty caused by the announcements.
Amid a turbulent start to 2025, most economists agree the markets are unlikely to hit last year’s 7.49 per cent achieved by the S&P ASX 200.
Reserve Bank of Australia governor Michele Bullock is similarly downbeat on the prospects for the year, saying uncertainty about the global outlook remains ‘significant’.
Next steps
If you are wondering about the impact the world events are having on your portfolio, get in touch with your local Nexia adviser to solidify an appropriate approach for you.
