What Follows Truss’s 44 Days?

Editors’ Note: MarketMinder prefers no politician nor any party. We assess developments for their potential economic and market impact only.

Forty-four (and a half) days. That is how long Liz Truss served as UK Prime Minister (PM) before announcing her resignation today, capping a madcap week in Parliament. Now the Conservative Party must hold another leadership contest to determine who will be this year’s third PM. A lot of names are flying around, as is talk of a snap election, with much chatter about who is and isn’t good for markets. In our view, this is the wrong way to think about it. While recent volatility may seem to imply otherwise, stocks don’t care about political personalities or the ideology of who is in charge. Remember this as the circus rolls on.

Mercifully, the replacement process should be short, unlike the months-long contest that determined ousted PM Boris Johnson’s immediate replacement. That race, with many runners and riders, went through multiple rounds of voting among Conservative Members of Parliament (MPs) before winnowing down to Truss—the grassroots’ preferred choice—and former Chancellor of the Exchequer Rishi Sunak, whom more MPs backed. Both spent the summer wooing party members, and Truss emerged victorious. But although the Conservative public at large remains largely favorable to Truss’s platform of tax cuts and deregulation, many Conservative MPs blame her ideology for their recent polling declines. So in what looks like an effort to keep Truss’s ideological bedfellows off the final shortlist, the party will require all leadership hopefuls to get the backing of at least 100 MPs in order to make the ballot. That would mean a maximum of three. In that event, MPs would vote Monday, then put the top two finishers to an online vote of all party members, which would run from Tuesday through Friday. But it is also possible that only one candidate attracts the necessary number of backers, which would negate the need for a vote. Either way, the matter will be settled by the end of next week.

Unsurprisingly, there are a lot of names flying around, including nearly all of the MPs who stood in the last leadership contest. But three seem to have the most traction and highest likelihood of securing 100 backers. One is Sunak, who seems to be riding a wave of buyers’ remorse among the party at large. Another is Commons Leader Penny Mordaunt, who did well among MPs over the summer before the more libertarian and traditionally conservative wing coalesced around Truss. And rounding out the pack is … Johnson, who has cut short a Caribbean vacation and has already started rallying his supporters, who argue he is the only one with a mandate from voters.

We don’t know how all this will shake out, but if the past six weeks are a guide, most pundits will focus on the contestants’ ideology and personalities. There will be talk of who is “good” and “bad” for markets, just as we saw while Truss was in charge. When she faced off against Sunak, there was much chatter about his centrism being good for markets and Truss’s “radicalism” being dangerous. When gilt yields jumped after her original Chancellor, Kwasi Kwarteng, released a “mini-budget” of small tax cuts and modest deregulation—then settled down after Truss fired him, U-turned on most of the mini-budget and installed Jeremy Hunt in his place—oodles of commentators argued Hunt must be markets’ preferred choice.

To us, it all reeks of bias and groupthink, which took the shape of fiery rhetoric that seemed to roil investor sentiment. Hence, in Truss’s case, markets seemed to overreact sharply to what was a very mild set of policy proposals that probably wouldn’t have boosted economic growth or sparked runaway inflation. Sentiment swings like this usually even out as investors gradually get over their initial knee-jerk reaction, and that probably would have happened in the UK if the political landscape allowed things to play out. Instead, the U-turn created the impression that the market reaction to these policies was legit, rendering a permanent verdict on not only them, but on the ideology behind them. Hence, the myth that stocks actually do play favorites among politicians will live to fight another day.

But in our view, it is important to see that Truss wasn’t inherently good or bad for markets. Nor was Johnson. Sunak and Mordaunt aren’t, and neither are any of the other potential challengers. The Conservatives aren’t inherently better or worse than Labour, which stands a good chance of winning a snap election if one is called. And Labour isn’t any better or worse for markets under current center-left leader Keir Starmer than his predecessor, avowed socialist Jeremy Corbyn.

In our view, what matters for markets is whether whoever is in charge has the clout to pass radical legislation that creates winners and losers and raises uncertainty for businesses. Any form of gridlock, regardless of who heads the government, reduces this legislative risk and helps uncertainty fall. On this front, the future for stocks looks bright. High uncertainty reigns at the moment, and it may continue if the next Conservative leader does bow to political pressure to call a snap election. But it should fall before long. As the past weeks have shown, there are too many divisions within the Conservative Party to pass anything of substance. The infighting that has plagued them will probably continue through the next election, whenever it occurs. And if there is a snap election, it will eventually resolve many of the current questions and—should Labour win—give markets clarity on its agenda and the likelihood of being able to pass anything big. At the moment, we suspect that likelihood would be low, given the party’s own deep internal divisions, not to mention the possibility that it would have to form a coalition with the centrist Liberal Democrats.

But we are getting too far ahead of things. For now, the wisest approach is to stay cool and tune out the noise. Think like markets. Don’t get hung up on personalities or your own biases, and don’t get caught up in short-term volatility. Don’t cheer or fear if the person headlines say is best or worse for stocks wins or loses. The likelihood that whoever wins could pass legislation that would have a meaningful economic impact—for better or worse—is low. Simply seeing this should help markets move past the uncertainty and get on with their day job of pricing in likely earnings growth over the next 3 – 30 months.