ELECTIONS hit our wallets in myriad ways. Taxes rise or fall on the whim of the incoming government and politicians have a propensity to meddle in everything from savings to mortgages.

However, elections also have the power to move stock markets. On paper, at least, your net worth could be hit by a shock election result in May.

In general, a Conservative victory is more welcomed by the money markets than one for Labour. Since the end of the Second World War, each party has won eight elections. But seven of the Tory victories have triggered immediate rises in the stock market on the day that the results were announced. Labour’s eight wins have led to five falls in the market.

In most cases, the market movements were fairly minimal. The most extreme reactions come when the election results wrongfoot the pundits and the pollsters. In 1970, Labour was expected to come to power, but the Tories won a surprise victory, causing a

5.1 per cent rise in the FT30 — the predecessor to the FTSE 100 as the index of top shares. An unexpected Labour win in 1974 sent the FT30 tumbling by 7.1 per cent, admittedly within the context of markets that were falling anyway. As John Major’s Conservatives snatched victory from a stunned Labour in 1992, markets gained 6.2 per cent.

John Ross, senior strategist at Fidelity Investments, the financial services company, says: “The figures show that markets react most strongly to the unexpected. The biggest movement in share prices is when pollsters get it wrong, or the consensus view is faulty.

“A Conservative win would be a surprise this time. In that event, my guess is that the market would rise. If Labour returns, nothing changes.”

Halifax, the mortgage lender, has looked at the three months before elections over the past 40 years. Martin Ellis, its chief economist, says:

“Although wider economic conditions play a part in the rise and fall of the stock market, election campaigns do appear to have a marked impact on share prices. The three-month period preceding any general election traditionally sees big share-price fluctuations as the market tries to understand the likely outcome.”

The largest rise in the three months before any general election was in 1979, when markets rose 20.1 per cent on the possibility of a Tory victory, only for them to fall by 17.3 per cent in the first three months of Margaret Thatcher’s term.

This week’s announcement by Tony Blair of an election on May 5 had little effect on the stock market, partly because investors are convinced that a Labour victory is virtually assured and partly because the date was expected. But if the Tories keep gaining ground in the polls we could be in for more of a rollercoaster ride.

David Cowdell, a director at Fidelity Investments, cautions against trying to time an investment to capitalise on the market’s pre-election nerves. “Timing the market at various points of the year is tempting, and getting it right can increase returns dramatically, but it is almost impossible to consistently predict the movement on a day-to-day, or month-by-month, basis. Therefore, it is important that investors stay invested in the stock market for the long term and do not try to time the market by dipping in and out.”

Although the stock market becomes jittery in the period immediately before an election, the longer-term picture is more complex. Halifax says that no one party can claim to have presided over the most bull markets, with both seeing their fair share of highs and lows. The Conservative Government of 1983 to 1987 was in power at the same time as a 123 per cent rise in the FT30 index, the largest growth in the market for any government since 1966. Harold Wilson presided over the largest fall — with the index dropping 51 per cent in his seven-month term after the election victory of February 1974.

Tony Blair has had a similarly mixed ride with the markets. His first term from 1997 to 2001 embraced the technology stocks boom and the immediate after-effects of the bursting bubble, averaging out to a real return of 3 per cent on the FT30. But his second term, affected by the continued fallout from slumping technology shares, has accompanied a 47 per cent slide in the FT30.