How does politics affect the stock market – and your investments?

Political decisions shape the economic environment in which businesses operate. Governments usually influence:

• Taxation: Changes in corporate or personal tax rates can affect company profits and consumer spending.
• Regulation: New rules around industries like energy, finance, or technology can shift market dynamics.
• Spending and investment: Public investment in infrastructure, healthcare, or education can boost certain sectors.
• Trade policies: Tariffs and trade agreements can affect the cost of goods and global supply chains.

These factors can influence investor confidence, business performance and ultimately, the value of your investments.

Here are some general scenarios where politics can affect the stock market:

• Elections: Markets often react to the uncertainty surrounding elections. Investors may adjust their portfolios based on anticipated changes in leadership or policy direction.
• Government budgets: When a government announces increased spending on infrastructure, companies in construction, engineering, and materials may benefit. On the other hand, budget cuts can dampen growth expectations and therefore affect the stock market.
• International relations: Diplomatic tensions or trade disputes between countries can lead to market volatility, especially in sectors that rely on global trade.
• Regulatory changes: These could happen in any industry, but as an example, a shift in environmental policy might boost renewable energy companies while challenging traditional energy firms.

Political events can influence your investments in several ways, often depending on the nature and scale of the decisions being made. For instance, markets may react quickly to breaking news or unexpected announcements, leading to short-term fluctuations in share prices. This kind of volatility is common around elections or major policy shifts, as investors have another look at risks and opportunities.

Over the longer term, political decisions can reshape entire industries. A government’s commitment to renewable energy, for example, might encourage growth in green technology companies. On the other hand, stricter regulations in another sector could make investors less enthusiastic about them. These shifts don’t necessarily happen overnight, but they can influence the direction of markets over time.

Currency values can also be affected by political developments. When uncertainty rises, whether due to leadership changes, international tensions, or economic policy, exchange rates may fluctuate. This can impact the value of overseas investments and the performance of companies that have a global presence.

While you can’t control political events, you can take steps to reduce their impact on your investments:

• Diversify: Spread your investments across different types of industry or businesses and geographical areas.
• Stay focused on your goals: Avoid making impulsive decisions based on short-term political news. Investing is a long-term journey.
• Keep learning: Understanding how politics influences markets can help you make more informed choices.

Politics and investing may be linked, but that doesn’t mean you need to be a political expert to invest wisely. By understanding the basics and focusing on long-term strategies, you can navigate political uncertainty with confidence.

And we’re always here to help you take the next step. Whether you’re just starting out or looking to grow your investments, take a look at our tools, guides, and resources to learn more and build a portfolio that works for you.

Learn about investing

If you still feel unsure about how politics may be affecting your investments, you can talk to an independent financial adviser. They can give you advice based on your goals. The government’s MoneyHelper service can help you find an adviser and offers free, impartial guidance.