My Inbox this morning is jammed with emails from the various fund management and money management firms we work with explaining their view about today’s dramatic news that Great Britain voted to leave the 28-member European Union after more than four decades of membership.
Compliance officers all over Wall Street are jammed today reviewing proposed email posts like this that advisors like us at Opus 111 Group are composing to send out to their clients to provide some perspective on what this news means to you on a historic day like today.
We have received multiple opinion pieces regarding the potential impacts of this Brexit development this morning and they continue to stream in. Rather than sending these to you, here is a digest of some of the reactions.
Common Themes You May Hear Over the Next Few Days, Weeks, Months:
In most of these reaction pieces, there are some common theories about what this may mean…and you will probably hear versions of some or all of these over the next days, weeks and months.
- Britain will suffer an economic slowdown and perhaps lapse into a recession.
- The Sterling’s value will plummet.
- The Bank of England will cut interest rates to shore up confidence in the wider economy, which may cause Gilts (Britain’s government bonds) to decline in yield.
- The European Central Bank will further expand its monetary easing.
- Inflation will rear its ugly head in England and Europe.
- European equities will suffer.
- In the US, the Federal Reserve may have to keep rates on hold this year, given the gloomy global outlooks and because a stronger US dollar will hamper US corporate profits overseas.
- This is a ‘populist’ backlash against globalization and other countries like Holland and France may also decide to exit the EU.
- The EU will collapse because of the UK and other countries wanting to bail.
However, here are some thoughts to keep in mind:
- The market opened down 550 points this morning which sounds like a lot, but only represents 3% of the value of the Dow Jones Industrial Average. To put this in perspective relative to 23% drop in the DJIA on October 19, 1987, the market would have to drop 4,100 points from Thursday’s close of 18,011 to be the equivalent.
- This vote to leave the EU is a referendum and is not a binding vote. Until the Parliament and British Government finalizes things, this proposed exit will probably not take affect for months and perhaps years.
- Britain only accounts for 3-4% of the Worlds Gross Domestic Product (GDP) (The US is about 23% of the world’s GDP.
- World stock, bond, commodity and currency markets are operating smoothly.
- Britain is a sovereign nation and like us, they have a right to join or quit a union and trade on their own.
When the markets fluctuate on breaking news, it is rarely if ever a good idea to react and sell. As you have heard from us on many occasions, we do not believe that it is ever a good idea to let short-term market volatility trigger investment changes in your portfolio. However, if something in your lives change, then that’s a different matter entirely—and one we would need to talk about.