If you've been following the news lately, you would've seen one of the top headlines being the impact of the general election on the stock market. How can an election impact the stock market though, you may ask. Well, the thing is that elections lead to increased uncertainty and volatility in the stock market. Investors never know which government is coming to power, and a new government means new regulatory changes, fiscal policy differences and improvised budget planning, all of which can lead to increased uncertainty amongst investors - causing the stock market to drop.
This uncertainty is especially exacerbated when the election race is unexpectedly close. In the 2024 general elections, that is exactly what happened. The BJP (Bharatiya Janata Party) won 240 seats while the BJP-NDA alliance obtained 293 out of the 543 Lok Sabha seats. The INC alone won 99 seats while the I.N.D.I.A alliance won a total of 232. While Modi's BJP-NDA government came to power and he took his 3rd oath as the Prime Minister of India, the election race was much closer than expected. Modi's "Abki Bar Charso Par" (This time 400+) seemed like a far-fetched idea rather than an easily attainable reality like they had previously believed.
When the election race is as close as it was in 2024, its impact on the stock market cannot be underestimated. The recent elections led to a major nervousness in the stock market resulting in the worst market crash in four years. Nifty 50 plummeted 8.5 percent to reach its intraday low of 21,281.45, opening at 23,179.50, on Tuesday. The Sensex began trading at 76,285.78, and it fell 8.2 percent to reach 70,234.43.
Sensex concluded the day at 72,079.05, down 4,390 points, or 5.74 percent, while Nifty 50 finished the day at 21,884.50, down 1,379 points, or 5.93 percent.
“Indian equities plunged after the vote counting trends suggested a lower seat count for the ruling NDA government. We have seen a spurt in volatility, and India's VIX crossed the 31.5 level, which created more pressure on the market," said Ajay Menon, MD & CEO, Broking & Distribution, Motilal Oswal Financial Services (MOFSL).
To understand where the market will be headed in the following days, volatility is expected to continue in the market until the focus shifts its focus to the core macroeconomic factors and upcoming Reserve Bank of India's (RBI) monetary policy meeting. “Once this turbulence stabilizes, attention will shift to the core macro factors affecting India. Investors should brace for volatility in the short term, but the underlying fundamentals of India's growth story remain strong," said Amisha Vora, Chairperson & MD, Prabhudas Lilladher.
To further emphasize on the aforementioned point, take a look at the dataset that I have compiled below:
The data shows that in historic lok sabha elections, especially when the election race was close - such as in 2004 - the market fell in the short term after that for a month or so. In the long run however, it is blatantly visible to see strong returns two years after elections. In the case of the 2004 elections, the market was almost 121.5 times its original size before the Lok Sabha elections. It is safe to say that we can expect something similar after this election cycle as well.
In conclusion, it’s clear to see the way that the unexpectedly close election race has impacted the stock market. With Nifty 50 falling by nearly 6% on the first day, we can expect to see high volatility in the market for a while ahead. Amidst all this volatility, however, I would strongly recommend investors to stick to the fundamentals of a stock (balance Sheet, cash flow, PE/Ratio, total assets, total liabilities, dividend-yield ratio, leadership, marketing, news, etc). If you’ve checked the fundamentals of a stock and they seem strong, I would recommend you to hold your position - the markets will rise again.
Excellent job Vivaan. Keep up the work