Markets unaffected by

With a federal election about five weeks away, investors may be trying to shield their portfolios from the effects political uncertainty can have on the financial markets. The trouble is, elections don’t seem to affect the Canadian markets, according to a study by the BMO Financial economics department.

BMO economists studied historical data from the six week period before and after the past six elections (between September 1984 and January 2004) for the three primary asset classes: equities, as measured by the main Toronto stock index; fixed income, as measured by yield spreads against the U.S.; and cash, as a function of the Canada-U.S. exchange rate. The conclusions were published in a research note this week.

“Our note does not find evidence of a systematic and meaningful impact of federal elections on Canadian financial markets,” said senior economist Sal Guatieri. “At most, the Canadian dollar may have been affected by two of the last six elections, while stock prices could have been affected by one.”

Even the finding that the dollar weakened before elections is questionable, Guatieri says. After correcting for factors such as commodity prices, interest rate spreads and general movements in the U.S. dollar excluding the Canadian dollar, the study found there were likely other causes for dollar softness ahead of the two elections.

“Elections generally do not have a meaningful impact on the currency,” Guatieri maintains. “The Canadian dollar’s weakness ahead of the November 1988 and November 2000 elections can be explained, for the most part, by factors other than the election.”

The correlation between elections and a presumed downturn in the equity markets was even more tenuous. Again there were two examples of pre-election weakness, but one of those — the November 2000 election — came on the heels of the September 2000 bursting of the tech-stock bubble.

On the fixed income market, spreads between Canadian and U.S. issues showed some weakness ahead of four of the six elections, but in none of those cases was it deemed to be statistically significant.

At first, it may feel a little disheartening that the world at large is not weighing the possible consequences of our collective decision making ability. But with only two parties realistically able to win — and both being relatively pro-business — Canadians can rest assured our political system is stable enough that electioneering won’t meaningfully affect markets.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com