As you’ve likely heard in the news, voters in the United Kingdom (U.K.) have chosen to leave the European Union (E.U.) after 43 years of membership. The resulting “Brexit” will likely affect the U.K. markets as well as the rest of Europe and the global economic markets. Since this marks the first time that a member state has elected to leave the E.U. since it was established the choice of the British has created much political and economic uncertainty.
Why Are Markets Down?
The stock market was down sharply after news of the Brexit on Friday due to the uncertainty the news created. The S&P 500 was down 3.59%, the Dow Jones gave back 3.38%, and the NASDAQ was 4.12% lower on Friday.
Previously investors knew there was a possibility that U.K. voters would choose to leave the E.U., the actual departure brings new uncertainty about the details and timetable of the exit process. In general, stock markets tend to decline with uncertainty.
What is Next for the Brexit?
The vote to leave the E.U. was only the first step. Next, the British Parliament must make a series of moves to begin the process. The exit will not be completed for at least two years, according to the E.U. guidelines.
The most pressing concern is that the U.K. will now have to negotiate new trade agreements as a stand-alone nation with both members of the EU and other countries like the U.S. and that takes time. Growth forecasts for Europe's GDP were in the range of 1.5% to 2% before the Brexit. Now that the exit vote has won, GDP estimates have been revised a full percentage point lower.
What Should You Expect?
There is fear among investors that global economic growth will slow substantially as a result of the Brexit. However, while we expect increased political and economic uncertainty, we do not expect global economic growth the be significantly affected. We do expect some negative effects in the short-term including:
- Stock market volatility.
- More low bond yields.
- Currencies (particularly the Pound Sterling) may decline and others advance
- The US Federal Reserve may be forced to delay interest rate hikes.
- Difficulty may lie ahead for U.K. markets.
On the Other Hand
The choice to reassert their sovereign status may actually provide a tonic to the British economy. The bottom line is that investors should generally ignore “scare stories” focusing on Brexit fears and rather focus on the economics. Great Britain runs consistent trade deficits with the rest of Europe. That means that Europe needs the U.K. more than the U.K. needs Europe.
Regardless of what European leaders say about the vote, the British have voted to leave, and most likely the rest of the E.U. is going to chase them to the ends of the Earth. It is highly unlikely that they allow one of their biggest export markets to become more distant.
They will more likely beg the U.K. to sign a free trade deal. In addition, and this is actually great economic news, it would free the U.S. and the U.K. to sign a free trade deal that the E.U. is now holding up. Any market volatility would be short-lived and any swing to the downside would potentially be a buying opportunity. We believe that Brexit is not a reason to sell.
What Should You Do?
In the wake of uncertainty, investors have a tendency to react emotionally instead of rationally. Emotional reactions tend to be immediate, but rational decisions take time as investors have a chance to digest data. The fact is that many fears about the global economy are likely overblown and are simply as a result of the increased uncertainty.
However, even if the short-term fears are overblown, investors should brace themselves for more uncomfortable market volatility as unfavorable economic data or political developments are released. While investors will be in for a choppy ride, it won’t be without opportunity, especially for investors with long-term outlooks and the ability to put aside volatility and make logical decisions.
We recommend waiting to make any changes to your portfolio or investments until you speak with a member of our team. If you are concerned or have questions, feel free to contact us by phone at (913) 663-1144 or by email at info@goostreefinancial.com. We will continue to update you through our blog and by email as the process of the Brexit unfolds.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index.
About Michael Goostree
Michael Goostree is the founder of Goostree Financial Group, an independent, father-son financial consulting firm serving individuals, families, and business owners in the greater Kansas City metropolitan area. With more than 45 years of experience in the financial services and insurance industries, he brings a wealth of knowledge to the table in regards to retirement planning, wealth management, and insurance. Believing plans are the key to success, he focuses on building comprehensive and personalized plans for every client he works with. To learn more about how Michael may be able to help, connect with him on LinkedIn, call his office at (913) 663-1144, or email him at info@goostreefinancial.com.