Do political biases affect the investors?
Created on 07 Jun 2019
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Updated on 24 Feb 2021
We all live in a world of perceptions. Our perceptions about the outside world lead us to our beliefs, which in turn shape our behavior and actions. Here, are a few examples that justify how biases affect our lives.
For example: If you perceive that there is a good possibility of rain in the evening, then, you prefer to carry an umbrella in the morning itself to work. If you perceive there is an excellent possibility of flood in your city, you prefer to instead move out of it for a few days for your safety. So, we live in a world of perceptions that make us bias towards things, persons, and situations based on our views of looking at them. Likewise, our biases of politics also influence our investing behavior.
How political biases affect investing behavior?
It is usually seen that when you are in favor of a political leader or a party who eventually comes to power, then you invest your money in various financial assets confidently. However, if by any chance any of the opposition parties come into power, then, you tend to be skeptical about investing your money in the stock market.
General Elections all over the globe, but the public in a dilemma about who will be the governing party? What rules and policies will they frame to favor businesses in each sector? After all, these policies or norms can either favor the functioning of businesses or can adversely affect the businesses. All this, in turn, has a direct impact on the pricing of the shares.
The stock market in the first half of the year 2019, before the election
As per the news reported by a well-known business daily, The Business Today, the Indian market prior to elections was nervous about how things will shape up in the future. There was no good news to celebrate about the political win in the country, and the few states who have had recent elections also failed to show promising results.
Before the current prime ministerial elections happened in 2019, the investors got worried whether the mutual funds will perform as expected or not. This kind of negative impact of political biases was also seen in the year 2009 when the Sensex hit 4869 points due to pre-election effect, and also due to the global economic crisis. One of the most significant slumps in the Sensex is seen in the year 2008 when it dipped by 27% in just one month.
The fluctuations in the Sensex is clearly visible in the graphs below. In the first graph, it is clearly visible that the market went down by 1.5% before the election and later it went up by 10%. The second graph showing sector analysis shows few sectors got severely affected due to political biases, whereas few others did reasonably well.
The stock market post-election in 2019
Though, the post-election effect on the stock market is yet to be fully witnessed, yet, it won’t be wrong to quote that the market volatility has reduced to a great extent. With BJP coming back in power, the nation is expected to thrive to become stronger and stable. The same belief is reflected in the stock market, which has become steadier.
As is clearly evident from the past data presented in graphs, it is clear that political opinions or biases do affect the stock investors to a great extent. The stock market does fairly well before and after the election, but during the election phase, the stock market gets negatively impacted.
A lot of investors are confused and think about when is a good time to invest in stock during the election year? Though, this is a very challenging question to answer, yet, the best reply could be to invest 2 to 3 months before the election and to stay invested for at least 6 to 8 months post-election.
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