How the market reaction to a new prime minister compares to history

The UK stock market barely moved the last time the country switched from a Conservative to Labour government but the opposite happened when Keir Starmer’s party was declared victorious in the 2024 general election.

In recent months, markets had taken the prospect of a Labour government with equanimity, given the party’s manifesto promises not to jack up taxes and what felt like a charm offensive towards the City.

Investor sentiment certainly appeared upbeat upon the election result and we saw a very strong start to the day on the stock market, even though gilt yields were little changed and the pound’s move higher was more to do with dollar weakness than the election. The key headline for investors was the FTSE 250 index enjoying a 1.8% rally in early trading on 5 July.

How the UK stock market previously reacted to a new prime minister coming into office

Source: AJ Bell, LSEG. *FTSE 250 index did not exist on this date

Analysis of previous changes by AJ Bell found that the FTSE 250 index only rose by an average 0.3% on the day a new prime minister came into office, dating back to the launch of the index in 1994 and beginning with Tony Blair’s victory in May 1997. The FTSE 250 is a better bellwether than the FTSE 100 because it has a greater weighting to companies which generate sales and profits in the UK.

For comparison, the average return from the FTSE 100 on the day a new prime minister was announced was -0.3%. That is based on changes in Number 10 since the FTSE 100’s launch in 1984, starting with John Major taking office in 1990.

The biggest ‘day one’ jump on the UK stock market was Rishi Sunak’s appointment as prime minister on 25 October 2022 where the FTSE 250 jumped by 2.8%. Such a reaction was in part due to the market expressing relief that the UK had appointed a new prime minister after Liz Truss’ chaotic but short-lived stint in Number 10.

Ironically, the second best ‘new prime minister’ day for the FTSE 250 was Truss coming into office on 6 September 2022. The 1% bounce in the UK index was the market showing a sigh of relief that the country had fresh leadership, after growing fed up with Boris Johnson.

In hindsight, the market would have reacted much differently if it knew what would happen to the pound, gilt yields and the stock market only a few weeks later when Truss and then-chancellor Kwasi Kwarteng delivered their disastrous mini-Budget.

The biggest movement from the FTSE 100 on the confirmation of a new prime minister happened in May 2010 when the country switched from Labour to Conservative leadership. Cameron taking the keys to Number 10 from Gordon Brown triggered a 1% sell-off in the FTSE 100 as Labour’s 13-year reign came to an end.

A 160% return from the FTSE 100, including dividends, since Cameron led the Conservatives back into power, up to Rishi Sunak’s last day, is not to be sniffed at. However, the Conservative’s chequered relationship with business and free markets over the past 14 years has made it easier for markets to contemplate a different regime.

The Tories’ run of five prime ministers since 2010 will go down in history as a period where the government took an increasingly interventionist approach to the economy, given initiatives like sugar taxes, Help to Buy, energy price caps, windfall taxes on North Sea oil producers, 2021’s National Security and Investment Act and proposals for changes to the 2005 Gambling Act under the recent review.