Navigating Market Fluctuations: How Political Events Shape Economic Trends

Navigating today’s markets can be quite tricky! We’re seeing a mix of influences, like the unique economic policies from Trump 2.0, the growing presence of far-right groups in Europe, and the developing relationship between Russia and the United States.

The ongoing conflicts in Ukraine and the Middle East add another layer of complexity. Plus, with the US President looking to shake up global trade rules, it’s definitely an interesting time for everyone involved!

In recent months we’ve seen volatility in some areas but cautious optimism in others in a reflection of the hand-in-glove relationship between politics and markets.

Of course, economic policies, laws and regulations– think tax increases or decreases, new business regulations or even referendums – have a big effect on how investors allocate their portfolios and that impacts 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 FTSE 100 performed poorly compared to other markets as domestic and international investors looked elsewhere to avoid risk. While it has risen since a massive drop during the coronavirus pandemic, the exodus of companies from the London Stock Exchange continues with almost 90 departures in 2024.

Interest rate movements and any hint of political instability can also bring about a sell-off or a rally in prices, with companies holding off on capital investment and causing economic growth to slow.

Global oil prices rose 30% in 2022 when Russia invaded Ukraine causing European stock markets to plunge 4% in a single day. Since then, oil prices have fluctuated and are now back to pre-war levels and gold has 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 noisy 2024 US Presidential campaign saw some ups and downs in markets during the Democrats’ upheaval and the switch to Kamala Harris as a candidate. Donald Trump’s various policy announcements on taxes, immigration, government cost-cutting and tariffs both buoyed and dismayed investors.

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.

However, 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 announced tariffs on Mexico, Canada and China, wiping off 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”.

Please reach out if you're monitoring world events and considering their impact on your investment portfolio.

Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.