Canadian Elections and Equity Markets

Theo Bousalis - Oct 15, 2019

Elections are an important time in Canada.  We see spirited debates (politicians yelling over each other during 3 minute intervals), lots of tough rhetoric (whether or not it comes to fruition), and uncertainty about the future of our country, companies and our economy. 

To cut through the noise, BMO Capital Markets Chief Investment Strategist, Brian Belski, examined elections’ importance on near-term equity performance in a historical context.  We thought it would be valuable to summarize his findings.
How does the Canadian equity market perform in the 12-months after an election?
Canadian elections have tended to be positive for near-term equity performance.  Since 1935, the market has rallied 9.4% on average 12 months after the election.  This is well ahead of the average annualized TSX performance of 7.8% over the same period.
What happens if the party I don’t support gets in?
Brian’s research shows little to no performance preference around the outcome of a Canadian election.  In the 12-months following a Liberal win, the Canadian equity market is up an average of 9.3%.  For the Conservatives, the average is 9.6% (from 1935).  The small difference amounts to noise rather than signal. 
What happens if a party fails to achieve a majority?
Interestingly, minority governments have been more positive for markets.  The average annualized TSX performance is 9.9% during minority governments, well ahead of the 6.5% average performance seen during majority governments (since 1935).  A theory on why this occurs - since 1960, minority governments tended to be more stimulative during their first 12-months.  On average this looser fiscal policy has amounted to 0.3% of GDP while majority government fiscal positions tended to stay static.

Are there other determinates that support market growth around elections?
Market valuations have a meaningful impact on near-term performance around elections.  This is supportive for our current election cycle as Canadian equities are at below average multiples.  In these situations, the market tends to outperform with both a majority and minority government. 

Election cycles tend to be positive for the Canadian equity markets without much prejudice for the party in charge.  This is a time to ignore the the news cycle, and focus on the fundamentals that are supportive for equity markets.
Brian’s full report can be found here
BMO Financial Group is also presenting a commentary call on the outcome of the election, the details are below.  Feel free to reach out for the dial-in or replay information if you are interested.