- If Rachel Reeves falls from office, her successor will become the twelfth Chancellor of the Exchequer to be appointed during a parliamentary term since the launch of the FTSE All-Share in 1962
- Her term has so far seen strong stock market returns for investors
- The UK stock market has tended to shrug off political shenanigans
- The gilt market response to changes in the nation’s chief bean counter offers no clear trend, on average either
- But the range of bond market outcomes is wide and owes more to the macroeconomic background of the time than mere politics
“Higher unemployment, lower job vacancies and cooler inflation are all giving holders of UK government gilts the chance to focus on macroeconomics, for a change, rather than politics, but the scope for a change in Prime Minister and maybe even Chancellor of the Exchequer is unlikely to stay out of bond vigilantes’ thoughts for long,” says AJ Bell investment director Russ Mould.
“The yield on the benchmark 10-year gilt has dipped below 5.00% as the macro data suggest the Bank of England may not need to take quite such a tough line on interest rates as markets currently expect, but any sign of political upheaval, a leftward shift in government policy or unfunded fiscal stimulus could yet mean this respite is short lived.
Source: ONS, Bank of England, analysts’ consensus forecasts, LSEG Refinitiv data
“The 10-year gilt yield was calm in the wake of March’s Spring Statement and even heading lower, amid the perception that both Prime Minister Sir Keir Starmer and Chancellor of the Exchequer Rachel Reeves were bending over backwards to appease bond vigilantes.
Source: LSEG Refinitiv data
“Tax increases to the tune of £40 billion in the 2024 Budget and another £26 billion in the 2025 version may not have pleased backbenchers or voters, but gilt holders welcomed the attempts to shore up the nation’s finances, balance income with spending and generate the tax revenue that ultimately pays the coupons, or interest, on those government bonds.
“It can therefore be argued the Iran war and Labour Party politicking are the reasons for the latest surge in UK borrowing costs, as both serve to aggravate the biggest issue that will face anyone who sits in 10 or 11 Downing Street, which is the size of the national debt and the associated interest bill.
Source: ONS
“The chancellor is sticking to her financial rules, which are to match day-to-day spending with income from taxes and reduce the aggregate deficit as a percentage of GDP on a five-year view.
“Last summer’s backbench rebellion in the House of Commons over welfare reforms was a complication, from the narrow perspective of bondholders, and the next round of Labour Party infighting has also put owners on gilts on alert. The yield on the benchmark 10-year gilt is higher than it was at the time of Labour’s General Election victory in July 2024, even though the Bank of England base rate is down over the same period.
How the stock and bond markets react to a mid-term chancellor
“Were Starmer to fall from office and Reeves to go with him, bond markets may not be best pleased, although much will depend upon the growth, taxation and spending policies outlined by their successors, should any challenges to them appear and prove successful.
“That said, financial markets have tended to approach political upheaval episodes with a fair degree of indifference, even if stock markets’ preference for a Conservative government rather than a Labour one still seems clear enough.
“Since the inception of the FTSE All-Share in 1962, eleven chancellors have taken office mid-way through a Parliament, following the departure of their predecessor – Roy Jenkins and Alistair Darling for Labour, in 1967 and 2007, and Anthony Barber, John Major, Norman Lamont, Philip Hammond, Sajid Javid, Rishi Sunak, Nadeem Zahawi, Kwasi Kwarteng and Jeremy Hunt the Conservatives in 1970, 1989, 2016, 2019, 2020 and (for the last-named trio) 2022 respectively.
“Only Jenkins, Barber, Lamont, Darling, Javid and Hunt held the post of chancellor at the time of a general election and only two – Lamont and Javid – stayed in office once the electorate got its chance to have a say.
“As if that were not warning enough to anyone who fancies their chances of unseating Rachel Reeves, Lamont lasted just thirteen months before he carried the can for the Black Wednesday sterling devaluation of autumn 1992 and was replaced by Ken Clarke, while Sajid Javid resigned after just three months after a row with then Prime Minister Boris Johnson over a Cabinet reshuffle.
“On average, the UK stock market took most of this in its stride.
“On average, the FTSE All-Share rose by 3.1% over the first three months of the new chancellors’ tenure, gaining 5.2% over six months and coming in more than 9% higher after their first year (although neither Javid nor Zahawi nor Kwarteng managed to last that long).
Source: LSEG Refinitiv data
“On the face of it, the gilt market, as benchmarked by the 10-year issue, is more sanguine still.
“Across those terms in office for which there is data available, the average movement in gilt yields is down by a fraction, not up. However, there is a wide range of outcomes.
“The 10-year yield rose sharply when John Major was chancellor as he raised rates to both fight inflation and defend the pound’s peg against the Deutschmark as it prepared to enter the Exchange Rate Mechanism in October 1990. Gathering debts, post Covid-19 and lockdowns, and political instability prompted gilt yield increases during the short tenures of Zahawi and Kwarteng. The latter’s term also featured poorly communicated policy, which in turn prompted unexpected bond market volatility thanks to the use of leveraged liability driven investment strategies and a mini-gilt market crisis.
“By contrast, the averages are flattered by how Norman Lamont, freed of the obligation to defend the pound, was able to slash interest rates once sterling fell out of the Exchange Rate Mechanism in autumn 1992. Lower benchmark base rates also characterised Alistair Darling’s stint in 11 Downing Street, which also saw then Bank of England Governor Mervyn King launch the Quantitative Easing (QE) bond buying programme that was designed to depress gilt yields and help the economy weather the Great Financial Crisis.
Source: LSEG Refinitiv data
“This suggests it’s clear that while political stability is welcome, there are many other factors at work when it comes to how the stock market performs and over their full term in office all chancellors encountered hugely different economic circumstances, with the result that the FTSE All-Share provided very different returns.
“Major was battling inflation and Darling a global financial meltdown, while Sunak had to contend with Covid-19 and the inflationary fall-out from that. Russia’s attack on Ukraine in 2022 was an additional complication, as it stoked inflation, and by then the tattered state of the nation’s finances started to confound a series of short-lived appointees as they sought to both balance the books and stoke growth at the same time.
Source: Office for National Statistics
“That is an issue that is yet to go away, either, given how the total sovereign debt continues to grow and the interest bill gobbles up more than the annual defence budget.
How the stock market reacts to a Labour Chancellor
“Rachel Reeves is the twenty-first Chancellor of the Exchequer since the inception of the FTSE All-Share index in 1962 and the sixth member of the Labour Party to hold the post during this period.
“She has already outlasted six of her predecessors, all of whom were Conservatives – the ill-fated Ian MacLeod, Kwasi Kwarteng, Nadhim Zahawi, Sajid Javid, John Major and Jeremy Hunt.
“From the narrow perspective of investors, her term looks successful, even if Labour backbenchers seem restive and gilt yields are higher.
“The FTSE All-Share is up by 24.6% in nominal terms.
Source: LSEG Refinitiv data, Government website. *To 21 May 2026 at 11:00
“This equates to a 17.6% gain in real, post-inflation terms.
“Cooler inflation and lower interest rates are helping here, both in nominal and real terms, and the rate of change in prices could yet define Reeves’ term as Chancellor, especially if the blockade of the Strait of Hormuz and stand-off between Washington and Iran drag on, with the result that oil prices, and the energy price cap, stay high or go higher still.
“The gap between nominal and real, inflation-adjusted returns from the FTSE All-Share index under some chancellors is truly glaring, and this is company that Rachel Reeves may not wish to keep.
“Inflation had a withering effect upon investors’ returns from the stock market under Labour’s Denis Healey chancellorship in the mid-to-late 1970s, even if his supporters would argue his record was tarnished by the need to tackle the mess left behind by the Barber boom and oil price spike of the early seventies.
“Inflation also chewed up the nominal gains made by the FTSE All-Share under the Tory chancellors Sir Geoffrey Howe and Tony Barber, who were in office between 1979 and 1983 and 1970 and 1974, respectively.
“Not all of the inflation that tore through the British economy in 1973-74 could be laid at the door of Mr Barber’s policies, as the 1973 oil price shock had a huge amount to do with it, and this highlights the importance of factors which are beyond the control of any chancellor, no matter how diligent or skilled.
“Alistair Darling could hardly have expected to inherit the Great Financial Crisis, which prompted a deep recession and a wicked bear stock market. Norman Lamont inherited British membership of the Exchange Rate Mechanism, fought to defend the pound and a policy in which he did not believe and oversaw a devaluation of sterling which actually helped the FTSE All-Share to rally. Mr Sunak had to contend with Covid-19 and the worst recession for three centuries, so perhaps he got the most treacherous hand of all.
“Investors, looking at the world through the narrow perspective of their portfolios, will be wanting Rachel Reeves or any potential successors to think back to Barber and Healey. The desire for growth is understandable, especially as rapid nominal growth could help to shrink the debt-to-GDP ratio, if borrowing and base rates are kept under control. But that is a big ‘if.’
“Failure to rein in spending could raise fears of fiscal profligacy and – in a worst case – a situation where suppressed interest rates and even money printing come into play as tools to make the aggregate debt manageable.
“The trajectory of the 10-year gilt yield, and perhaps the gold price, may give investors a useful steer as to the likelihood of such a scenario.”
Source: LSEG Refinitiv data
