Last week the United Kingdom approved a referendum to exit the European Union. Most of the polls, analysts and markets had expected the vote to go the other way, so the response globally was decisively negative. The British pound, the Euro and all major stock markets declined sharply. While no one knows what the outcome will be, here is our perspective of the impact on the economy and markets.
- U.S. equity markets have declined by 5% or more, with bigger declines in Europe. For perspective, the decline in the U.S. brings the market back to where it was about a month ago.
- The vote to exit creates a heightened degree of uncertainty and volatility in financial markets and in currencies as the exit agreement is negotiated over the next two years.
- At this time, we do not believe that the decision signals anything like the financial crisis of 2008-2009 as banks are in a much stronger financial position today. The U.S. economy is strengthening and will be able to handle short term pressures like this.
- The UK referendum appears to be more of a movement to take back sovereign control over immigration and other domestic issues, rather than being about trade. Expectations are that many of the trade protocols are likely to remain the same.
- We expect that this decision will likely result in a delay of the Fed raising rates to September or December at the very earliest.
While the market volatility and uncertainty over this decision may persist in the near term, we do not make investment decisions based on economic forecasts or market trends. Our investment process is based on long term fundamentals and valuations.
It is important at times like this to keep in mind that our investment decisions are made with the expectation that there will be times of stress in the future. We advise clients to stay the course with their long term investment plans as we monitor developments and assess the impact on long term fundamentals.
In sum, this is a major political upheaval for the UK and may have a negative impact on UK and EU growth. At this point we do not think the developments will be too much of a drag on U.S. and global growth rates. As always, if you have any questions about the impact of these developments on your investment position, give us a call.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.