Investors obsess over Westminster. The stock market usually doesn’t
At the time of writing, British politics appears to be descending into another period of chaos. There are growing rumours that Prime Minister Keir Starmer could face a serious challenge to his leadership. By the time this article is published, events may already have moved on. Such is the speed of modern politics.
But while political journalists are glued to Westminster intrigue, most long-term investors should probably care far less than they think.
This might sound strange. After all, surely political instability must be terrible for the stock market?
In reality, history suggests otherwise.
The UK stock market has repeatedly delivered strong returns during periods of political turmoil, weak governments, leadership crises, referendums, resignations and economic uncertainty. That is because the stock market is not the government. It is not Parliament. And it is certainly not whichever politician happens to be standing outside Number 10 Downing Street.
The UK stock market is ultimately a collection of businesses whose primary goal is to make money.
And most of those businesses are far more influenced by global economic trends than British political drama.
The UK stock market is not really “the UK”
One of the biggest misunderstandings investors make is assuming the FTSE 100 is a direct reflection of the UK economy.
It is not.
The FTSE 100 is dominated by huge multinational companies that generate much of their revenues overseas. Firms such as Shell, HSBC, Unilever and AstraZeneca are global businesses.
They care far more about:
- Oil prices
- US interest rates
- Chinese economic growth
- Global consumer spending
- Currency movements
- Commodity cycles
- Worldwide demand
than they do about the latest leadership battle in Westminster.
In fact, many FTSE 100 companies earn only a relatively small percentage of their revenues from the UK itself.
That means political instability in Britain often has a surprisingly limited effect on their long-term profitability.
We have seen this movie many times before
British politics has experienced repeated periods of instability over the past few decades.
Yet the stock market has continued climbing over the long term regardless.
The Thatcher downfall
In 1990, Margaret Thatcher was forced out after years of political dominance. At the time, this was viewed as a seismic political event.
But the stock market did not collapse.
Investors quickly moved on and focused on broader economic conditions instead.
Black Wednesday
In 1992, Britain crashed out of the Exchange Rate Mechanism in what became known as the Black Wednesday. It was one of the most humiliating moments in modern British political history.
The government lost credibility. Political confidence was shattered.
Yet what followed was actually a strong period for UK equities and the wider economy.
Lower interest rates and a recovering economy mattered far more than the political embarrassment itself.
The Global Financial Crisis
During the 2008 financial crisis, governments around the world looked fragile and overwhelmed. In the UK, political pressure intensified dramatically on Gordon Brown and the Labour government.
Markets initially crashed because of the banking crisis and global recession — not because of Westminster politics.
And when markets recovered, they recovered because businesses adapted, central banks intervened and economies stabilised.
Again, economic cycles mattered more than politicians.
Brexit chaos
Perhaps the best recent example is Brexit.
From 2016 onwards, the UK endured years of political paralysis:
- Prime ministers resigning
- Leadership contests
- Parliamentary deadlock
- Constant uncertainty
- Markets predicting disaster
We went from David Cameron to Theresa May to Boris Johnson in relatively quick succession.
And yet many large UK-listed businesses continued generating profits throughout.
Some sectors struggled. Others thrived.
Global factors such as Covid recovery, inflation, interest rates and energy prices ultimately had a much bigger impact on market returns than parliamentary arguments over Brexit procedure.
The Liz Truss mini-budget crisis
The clearest counterargument people often raise is the brief premiership of Liz Truss in 2022.
Markets reacted violently to the mini-budget. Gilt yields surged and the pound fell sharply.
But even here, it is important to understand what markets were reacting to.
This was not simply “political instability”.
Markets were responding to concerns about borrowing, inflation and fiscal credibility. In other words, economic fundamentals.
Even then, the wider stock market reaction was far less dramatic than many people remember, particularly among large multinational FTSE companies benefiting from overseas earnings.
Businesses adapt faster than governments
Another reason politics matters less than many assume is that businesses are highly adaptable.
Governments move slowly.
Large companies do not.
Businesses can:
- Cut costs
- Expand overseas
- Raise prices
- Innovate
- Acquire competitors
- Shift strategy
- Hedge currency exposure
The private sector is remarkably resilient over time.
A company selling pharmaceuticals globally or mining copper in South America is not going to stop operating effectively because Westminster is having another leadership battle.
This is one reason stock markets tend to rise over long periods despite endless political crises, wars, recessions and elections.
The market constantly adapts.
Investors often overestimate political risk
Humans are naturally drawn to dramatic headlines.
Politics creates emotional reactions because it feels immediate and personal.
But investing success usually comes from focusing on the bigger picture rather than reacting emotionally to short-term noise.
If investors had sold every time there was political turmoil in Britain over the last 40 years, they would likely have damaged their long-term returns significantly.
The reality is that markets spend far more time responding to:
- Inflation
- Interest rates
- Economic growth
- Corporate earnings
- Productivity
- Technological change
- Global trade
- Demographics
than they do to which politician occupies Downing Street.
That does not mean politics is completely irrelevant.
Tax policy, regulation and government spending absolutely matter over time.
But for long-term investors, political headlines are often far less important than they initially appear.
The real danger is making emotional investment decisions
Periods like this often tempt investors to panic.
When political uncertainty rises, many people feel they should “do something” with their investments.
History suggests this is usually a mistake.
The market has already lived through:
- Government collapses
- Wars
- Referendums
- Financial crises
- Pandemics
- Inflation shocks
- Banking crashes
And yet global equities have continued compounding wealth over the long run.
Investing is ultimately about owning productive businesses.
As long as businesses continue innovating, generating profits and adapting to changing conditions, markets tend to recover and grow over time regardless of political drama.
Which is why, despite all the noise surrounding Westminster today, the long-term trajectory of the UK stock market is likely to depend far more on the global economy than on whether the current Prime Minister survives the month.
Carl Roberts, Director
If you want to learn more about this topic, please find the link here.
More information about our fund, the YFS Intelligent Wealth Fund, can be found here: Hargreaves Lansdown or AJ Bell.
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
