Markets have just been handed the worst possible electoral outcome, the one they dreaded most, a hung parliament.
At time of writing Prime Minister Theresa May can possibly hang onto power, but only with the full support of the Democratic Unionist Party (DUP) in Northern Ireland, who, I hate to say, most Britons had barely even heard of yesterday.
Labour leader Jeremy Corbyn’s triumphant campaign wasn’t enough to bring him to power – yet. These days, anything can happen.
So how have stock markets reacted? The knee-jerk response after last night’s shock exit polls was that Friday would see collapsing share prices, a bond market meltdown and all sorts of horrors inflicted on the pound.
Yet it hasn’t happened. At time of writing the FTSE 100 is actually up around 0.5%. The domestic-focused FTSE 250 is down around 0.9%, which is hardly the end of the world.
Sterling weakened, but far less than expected. In fact, the pound is defiantly climbing comfortably above $1.27 and hovering around the €1.14 mark. Down, but far from out.
What is happening?
We all know that markets hate uncertainty and there is nothing to celebrate in the fact that no party has a majority. We do not even know will be heading Brexit talks, or even if they will be held at all.
Yet at the same time, the UK is a mature democracy, and nobody is expecting riots, revolution and social breakdown.
Also, many are nursing hopes that the UK can avoid a hard Brexit that would have been punishing for business and the economy.
Theresa May – if she survives – is in no position to drive a hard bargain, even if the DUP is apparently pro-Brexit (I’m quickly getting up to speed on their policy positions). The rules of the Brexit game have just changed.
That said, if the uncertainty drags on, it might also drag down the stock market. Most private investors will be understandably reluctant to part with their money at this point, so fund managers may see a drop in net inflows.
Consumer spending and wages are already being squeezed, and if the pound does slip lower, a spike in inflation could make many people’s lives harder. At least the oil price is falling.
The housing market has just dropped for three successive months, according to Nationwide, and looks set to slide lower with people reluctant to make big financial decisions amid such uncertainty.
Cool and collected
The only sensible response is a very British one: keep calm and carry on.
We faced a hung parliament as recently as May 2010, and the FTSE 100 fell 2.6% on the Friday the news broke. It then rallied 5.2% on the following Monday after Prime Minister Gordon Brown resigned.
One year later, the index was trading 13.6% higher.
The underlying economic fundamentals assert themselves in the longer run, regardless of the mess made by politicians, and let’s be grateful for that.