Is the stock market really worse off under Labor?

For years, it's been an unwritten truth among many investors: the Australian stock market performs better under a Coalition government.

The thinking goes like this: pro-business policies, tax cuts, and deregulation help fuel returns, while Labor's progressive policies, social programs, and government spending are seen as a drag on performance.

It's a narrative that makes for punchy headlines and campaign slogans. And it spills over into investors wondering how to position their portfolio once they know who will govern for the next three years.

But does the data back it up?

Well, it's been over a month since Labor's landslide victory, and the market has reacted: up 4%.

But what does that say about the market? Not much, according to Bhanu Singh, CEO, Australia and senior investment director at Dimensional Fund Advisors.

Dimensional analysed the monthly returns of Australian stocks between January 1970 and June 2024, using the MSCI Australia Index, which represents 85% of the market capitalisation in Australia.

It showed that returns in months when federal elections took place did not reflect any consistent patterns.

"What you find is - and this is not unique to Australia - election returns, or election months, or election outcomes generally tend to be well within the distribution of outcomes in a market scenario," says Singh.

Do events drive markets?

Markets don't move simply because of who wins an election. What moves markets in the short term is uncertainty.

When major events happen - whether it's Brexit, Russia invading Ukraine, or a federal election - the headlines come thick and fast. There's intense analysis as markets try to figure out how the news might affect different parts of the economy.

"Markets are digesting a lot of information about what that news might mean for certain sectors," Singh says. "It's not as simple as saying Labor is good or bad, or the Coalition is good or bad. There's a lot of nuance that the market is constantly working through."

The real issue for investors is whether the uncertainty stays within the normal range of market fluctuations, or whether something unexpected is taking place that could trigger larger moves.

The outliers

There have been sharp market moves around some election periods, but rarely because of the election itself.

In May 1974, Labor's Whitlam government was re-elected. The market fell 14%.

But at the time, there was an oil crisis and a global recession. Europe was shifting to smaller diesel cars due to the Middle East oil embargo and the Bretton Woods system collapsed.

"Oil prices shot up, the recession hit, and that was the broader market backdrop," says Singh. "Regardless of the election outcome, markets likely would've reacted to those global events."

Or consider 1987. Labor's Bob Hawke just won re-election, and markets were up nearly 15%.

"There was a massive rally before the October crash, and after the crash, we ended the year roughly flat," says Singh. "That context matters. To say the 14% or 15% market movement was due solely to an election is hard to justify."

"Often a headline says, 'Election happened, markets did this,' so the two must be linked. But when you look at the broader context, they're often not."

What does drive markets?

While elections and other events may grab headlines, they rarely dictate long-term returns. What matters most are company fundamentals.

"The price you pay matters. The cash flows a company generates matter. Company size, profitability, relative valuations - these are the things that drive long-term returns," Singh says.

As an asset manager, Singh says his team studies these factors to better understand where opportunities exist.

"We've got two pieces of the puzzle we're trying to solve. One is to understand how markets behave. Figure out why do markets do what they do overall, and then, more importantly, are there certain sectors, certain stocks, certain bonds, that behave differently, meaning that perhaps they outperform or expected to outperform, the broader markets?" he says.

The goal is to construct portfolios that harness these insights. Without that, Singh says, "everybody buys the market and calls it a day."

Even when unexpected events jolt markets in the short term, it's long-term business performance that shapes investor outcomes. For younger investors with 30 years or more ahead of them, temporary market moves aren't what will decide their financial future.

"The question becomes: what moves markets in the long run, and how do you outperform them? In equities, it's not just the overall market movement but how individual stocks move within the market," Singh says.

Ultimately, companies that generate strong earnings relative to price, maintain healthy profitability, and offer attractive valuations tend to outperform over time.

"Generally, companies where you pay less and that generate higher profits tend to outperform the broad market, which makes intuitive sense," Singh says. The challenge lies in applying that research effectively when building real-world investment portfolios.

Lies, damn lies and statistics

It's easy to pull out a market movement and link it to an election result or any event of the day. A 4% rise here, a double-digit fall there. The headline writes itself. But as always with markets, the truth is more complicated.

Data can be used to support almost any argument if you cherry-pick the right moment in time. A single post-election bump or dip can make it look like one party is better for markets than the other. But stretched over 50 years of evidence, those easy narratives tend to fall apart.

"You might see a headline saying the market moved 4% because Labor won," Singh says. "But markets move 4% in a month quite often. Once you put it in context, it's not really a story."

This is where asking the right questions matters. Rather than hunting for patterns that confirm an opinion, stepping back to examine the full picture reveals what really drives returns: fundamentals like company earnings, valuations and long-term growth.

Politics can shape sectors, influence regulation and shift policy direction. But over decades, it is business performance that moves markets. The numbers tell the story, if you're willing to listen for longer than the soundbite.

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