General elections can influence stock market. Here's what you should know and do

Mr Market is known for being dramatic. Sometimes, even unfounded news could spark volatility over a short period of time. Given its high-strung nature, general elections are definitely a big deal for the market; it can hold a great sway over them.

With the 2024 general elections in full swing, many investors feel they are in the dark about how the market will react. And who can blame them for seeking a clear, identifiable pattern? Which is why we uncover the truth by seeking answers to the following three questions.

Q1: Do general elections influence the market?

Unfortunately, there is no black-and-white answer. In 2004, the market slumped both before and after the election results. Perhaps the Sonia Gandhi-led United Progressive Alliance's (UPA) victory confounded most poll pundits.

Five years later, the market celebrated the continuity in governance with a one-day gain of 17.3 per cent. The euphoria was captured by the market in the subsequent months as well.

The 2014 and 2019 elections saw landslide victories for the Narendra Modi-led National Democratic Alliance (NDA). But the movement in the market was subdued, as the market had already baked in the expected wins.

In short, there's no clear pattern as to how the market reacts during and after the polls. If one had to make a snap judgement, the market's behaviour depends on how surprising or not the election results are.

Q2: Which sectors do well after elections?

There's no precise answer here, either. In this case, each election has unearthed a different hero. In 2004, it was IT; in 2009, the Auto sector took over; Pharma ruled the roost five years later; and Financial Services topped the charts in the last elections. Ironically, Pharma, the gold medallist of 2014, was a bottom-feeder five years later. In short, predicting post-poll sectoral heroes is a game of musical chairs at best.

Q3: Should you start/continue SIPs?

While there may be ambiguity in the above two situations, the answer to this question is a resounding 'yes'. No matter which government is in power, stop second-guessing and start/continue your investing journey.

In the long run, you'll be sitting on a double-engine booster. Because not only do equity mutual funds do well over the long term, but you'll also be sitting on the tailwinds of India's growth story.

The numbers testify. Let's first look at the long-term performance of Sensex between March 2014 and March 2024. If you held your investment in Sensex for five years, there was no chance of incurring negative returns ,on a monthly rolling basis. In fact, you'd have earned returns of over 12 per cent two-thirds of the time.On the other hand, if you held the investment for just a month, the probability of earning negative returns would spike to 38 per cent.

Looking at India's growth story, the economy has purred like never before. We toppled the UK to become the world's fifth-largest economy in 2022. The next four years are tipped to be equally bullish, as per Jefferies, a US-based capital markets firm. It expects the country to leapfrog Germany and Japan by 2027 to become the third-largest economy.

Clearly, the long-term future appears bright. So, keep calm and ride the tidal wave of India and equity's long-term potential.

Also read:
Playing smart on elections
Our view on India's economic growth