If you have seen the news lately, you have almost certainly heard of Brexit, or Britain’s referendum last week, resulting in the surprising vote to separate from the European Union (EU). Glancing at the headlines, and looking at the sharp drop in global markets, you might get the impression that we are on the verge of the next global calamity.
But what does it all really mean? Immigration was a key driver in this decision, and there will be economic consequences as well. But how far does this vote go? Are the Brits going to build a wall, or close the Chunnel, and cut themselves off from the rest of Europe? Are they going to start driving on the right side of the road, or perhaps finally start calling it soccer instead of football?
All kidding aside, there are certainly quite a few negative (or downright pessimistic) headlines, but it is difficult to say with any certainty now what the long-term consequences of this vote will truly be. Assuming the movement continues forward under new leadership, the actual exit from the EU will not take place until 2018, so it will be years until any changes are directly felt.
So how bad is this, really? Britain will have to renegotiate trade treaties with the EU, US, and other countries. Dealing with the EU now as an outsider could have the biggest economic impact, if the EU takes a harsh stance to punish the vote or prevent similar moves from other EU members. Britain will almost certainly see a decline in GDP, and it’s possible it could drop far enough to push them into a recession.
Back on our side of the pond, the direct impact on US-based companies is not as significant, as the U.K. only accounts for about 4% of our total exports, and only 0.3% of the United States GDP, according to the Bureau of Economic Analysis. One likely impact will be the Federal Reserve might use this as a reason to continue delaying overdue hikes in interest rates.
The most significant impact by far is political uncertainty, a topic that we seem to hear every year. Will Scotland or Northern Ireland try to leave the United Kingdom? Will there be a domino effect on EU membership, where other countries that are unhappy try to leave as well? What are the implications on global politics? Will this impact collaboration as the US works with these ally countries to fight global threats?
As you can see, there are clearly far more questions than answers at this point, and it is this fear and instability that has created this most recent market volatility. We don’t have the ability to predict how far the market will drop or exactly when it will recover. However, history has taught us that volatile markets can be opportunities to re-balance portfolios, or perhaps invest cash that has been sitting on the sidelines.
History has also taught us that we should avoid knee-jerk reactions to headlines. We feel that Brexit will just be another note on the long-term growth chart. However, if you feel that your risk tolerance has changed, or you just want to review your portfolio in light of these latest market events, please feel free to call the office and we will be happy to set a time to discuss.
Thanks,
Tom