Can Stocks Stay Irrational Until Election Day?

The Indian general elections are getting close. The dates have been announced and political parties have entered poll mode.

But what about the stock market? Is it affected by the elections at all?

Well, the simple answer is yes, it is. However, once the elections are done, history tells us, the markets continue on their merry way.

An exception to this is when the results go completely in the opposite direction to the market's expectations. In 2004 when the incumbent NDA government was voted out, the markets crashed.

The fear at that time was that the new government would have communist parties as alliance partners. It was believed that such a government would reverse business-friendly policies.

These fears were unfounded as the market entered a long, record-breaking bull run which only ended in January 2008.

Could something similar happen this time around?

The expectation this time is for the Modi government to return to power again.

If this expectation is belied, then there could be a correction in the market. However, this is likely to be short-lived, considering what has happened in the past.

If the results are as per expectations, there could be a short-term spike in the indices. On the other hand, if there is a negative surprise, the markets could tumble for a few days.

We at Equitymaster, believe the bull market is not under threat due to election results and long-term investors have nothing to worry about. It's just that, in the short-term, there could be some volatility.

Investors would do well to invest in high quality stocks for the long term, no matter what happens on result day.

The best approach would be to separate your focus. The election results and the market's movements are not corelated 1:1. That's just the wrong way to think about stock prices.

So, what is the right way?

Focus on Your Stocks Instead of the Market or the Election Results

It's important to delink your thought process about the stock market and whatever could affect it, like elections, with your personal stock portfolio. Think of them as separate entities.

Elections or no elections, you should take decisions about your portfolio based on these factors...

• What is my objective of investing my hard-earned money in the stock market?

  Is it to build a retirement corpus? Achieve a target return or amount within a certain time? Or something else? Each investor's answers will differ.

  And the answers should be a decisive factor in picking the stocks in your portfolio.

• How much money out of my investable funds will I invest in the market?

  Perhaps you're comfortable investing only 10% of your funds. Others may be comfortable with 100%. There is no right answer.

  But the percentage amount will dictate how much attention you should direct to the stock market. And how much sleep you should lose over it.

• What kind of stocks and how many stocks am I comfortable with?

  These are important questions that demand time and patience from investors. And once again, there are no right answers.

  You could pick a few stocks in a concentrated portfolio or diversify widely. You may be comfortable with mostly safe bluechips with a small number of midcaps and smallcaps or the other way around.

  Both are fine.

  You could choose to focus on value investing or growth investing or stick to purely momentum stocks or penny stocks, or some combination of these. Each investor must find his/her comfort zone.

• When should I sell stocks? What should I do with the cash in my portfolio?

  If your stock has achieved its target price and you sell it, then that's great. But do you have a plan for the proceeds?

  Do you have another stock in mind? How did you select it? Will you keep any extra cash in a FD?

  What if you think there could be more gains ahead and so you don't want to sell... but at the same time you're afraid of a correction spoiling the gains that you're already sitting on?

  There are no easy answers here. One investor's answer will differ from another. But both investors may be correct in their own assessment. This is because their financial situations are different.

Conclusion

Consider investing in a group of stocks which are fundamentally strong, and are also indifferent to the 2024 elections.

These stocks are dependent more on the broader long term India growth story and are not directly related in any major way to the popular themes of the Modi government.

If the Modi government does not return to power and the market falls, then these stocks may not fall much because they were not related to any of the major themes.

But if the Modi government does return to power and the bull run continues then these stocks may also do well on account of their fundamental strength and their reasonable valuations.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...