What Boris Johnson resigning could mean for the stock market

Jon Smith talks through the reaction to the latest headlines around Boris Johnson in the stock market, and what could happen from here.

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It has been said that a week in politics can feel like a lifetime. Certainly, the amount of action this week has been enough for a long time — and we haven’t even reached Friday yet! With my investing hat on, I want to stay politically neutral and assess what the implications could be of Prime Minister Boris Johnson resigning on the stock market. Here are the key points.

The moves so far

The latest headlines coming out from different news outlets is that Johnson is imminently set to resign. This comes after a rocky 24 hours that has seen resignations from key cabinet ministers and other more junior members in the Conservative Party.

The Prime Minister has already survived a vote of no confidence only a few weeks ago. This means that his leadership cannot be challenged in this format for another year. Therefore, the only viable way of a change at the top would be his resignation.

As for the stock market, we didn’t see much reaction to the vote in June, or to the resignations yesterday. However, this morning we’ve seen the first indications of a move, with the FTSE 100 shedding 40 points in a few minutes when the headlines came through.

This move correlated to a jump in the value of the British Pound at the same time.

Implications for the short and long term

In the short term, I think that overall sentiment could improve with a change of leadership. A clean start for the new leader, along with hitting the reset button on fiscal policy from the new Chancellor, could both be taken well.

One of the main drivers for the stock market in recent months has been the cost-of-living crisis. A new Prime Minister could launch a range of packages to provide more stimulus for people. This could help to increase spending, which in turn would help to boost revenues for various sectors in the FTSE 100. These would include consumer staples, consumer discretionary and the travel industry.

Another positive longer-term point is a potential change in policy from the Bank of England. Political uncertainty (with a small chance of a general election) is something the central bank will take into account when making future policy decisions. It may decide to trim down future interest rate hikes later this year until there is more political stability.

As the FTSE 100 reacts negatively to higher interest rates, this could be supportive of the market going foward.

Stock market risks remain

One concern I do have is that a rally in the British Pound would hamper the stock market. Most of the FTSE 100 companies are net exporters, meaning that a weaker currency is good for business. If the Pound appreciates in value, it could hurt the finances for firms and actually be a negative.

Clearly, the situation is very fluid. As a long-term investor, I note the moves day by day but am still focused on performance in years to come. From that angle, I’m sticking to investing in sectors that I think offer good value. If I do see any surprise dip, I’ll use it to take advantage and buy undervalued stocks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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