“Historic.” “Seismic.” “Pure chaos.”
Those are just a few of the printable descriptors used today to describe the “Brexit,” Britain’s vote to leave the European Union. While polls leading up to the vote were close, few truly expected last night’s outcome. To put it mildly, it shook the world.
Of course, the stock markets hate surprises. We all remember watching stocks dive in 2008 after the Lehman Brothers collapse. It was gut wrenching, but perhaps mostly because it was quickly becoming clear how deep the financial crisis really was. Yesterday’s vote hit the markets hard as well. In an immediate reaction to the vote, global markets reeled. By the end of today’s trading, the Nikkei was down 8%, and the Dow was down 3.39%. And yet, it’s clear that the Brexit doesn’t have the widespread significance of the 2008 financial crisis—a fortunate fact for those of us in the US.
Sadly, it’s unlikely the UK will fare as well. Voters in the UK chose to believe the words of Boris Johnson, the populist leader of the “leave” movement and the presumptive next Prime Minister now that David Cameron has stepped down. The people were swayed by Johnson’s claims that leaving the EU would result in both control of the Britain’s borders (to reduce immigration) and greater prosperity. I think he was wrong. Britain needs the EU in order to continue being a successful economy. But economic benefits came with EU policies that repulsed many Brits. Frustration and rage were a loud voice in this vote, and the consequences may not be what the “leave” voters had in mind. Here’s what I think the Brexit vote will really mean to Britain:
- A recession. How deep and how long? Only time will tell.
- A drop in currency value, especially against the US dollar. The pound has already dropped 8%, and that number could grow.
- A shrinking economy. And we’ll see the usual fallout: fewer jobs, greater unemployment, and falling hom
For those of us on this side of “the pond,” Britain’s storm should deliver much smaller waves to our shores. Here’s what we might expect:
- Interest rates will remain at historic lows. Janet Yellen and the Fed have taken a rate hike off the table until further notice.
- A US recession is unlikely. US earnings are solid, employment is up, and there are no indicators of a pending slide. As long as US consumers continue to gain confidence, this should not change.
- Slower growth is likely due to the stronger dollar.
Luckily, the US is not as vulnerable to the Brexit as other countries. Unlike the mostly EU countries that are Britain’s most active trading partners, only 13.4% of our economy is made up of exports. Compare that to Germany whose trade is a whopping 50%. Our economy is highly insulated from Europe and much of the rest of the world. Rising incomes and a rising economy are still in place here.
If your stocks are 50% or less of your portfolio, you should be fine over the long term. But we’ll probably see more volatility for some time as markets adjust values. If you are only invested in US-based companies who are indirectly exposed to Europe by doing business there, then your position is even stronger.
This is nothing like 2008. But if the situation begins to mirror last February, we could see a larger drop before things turn around. The Dow dropped 12.5% then and fully recovered by the end of the quarter on March 31. Today we saw a mere 3.39% drop, so the ride could get rougher. If you’re seeking advice on how to ride it out, know that we placed 50 “buys” today for stock funds and ETFs to take advantage of today’s “sale” on stocks. I have full faith we’ll be glad we did.
Remember, this too shall pass. Hang in there, focus on living your life, and know that if the riding gets too rough to handle, we’re here to answer your questions and address your concerns.
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