Britain voters sever ties with the European Union
Clearly, the subject on everybody’s mind this Monday morning is Brexit. For those who may have been on an extended vacation to another solar system, Britain voters on Thursday last week voted to sever ties with the rest of the European Union. The vote sent shock waves through financial markets around the world, cost the British Prime Minister his job, and left most observers speechless.
Certainly, Brexit is likely to have far-reaching geopolitical implications. From our small spot on the planet, however, we expect that most of the questions on clients’ minds will revolve around a general theme: “What does this mean for me and my portfolio?”
Global stock markets plunged on Friday. The US stock market was down more than 3%, with the Dow Jones Industrial Average index shedding over 600 points. As we muse, the Dow is down another 1.6% (280 points). The financial damage, however, has been more severe on the Continent.
To put Friday’s stock market reaction to Brexit in perspective, it is important – nay, essential – to start with what we know. We know, for example, that markets don’t like uncertainty or, to use the words of Donald Rumsfeld, “unknown unknowns.” Events like Brexit – and the 911 terrorist attack on the US and the 2008 financial crisis – are inherently unpredictable. When they happen, they ignite a market wide rush for the exits. Risky assets, like stocks, are sold indiscriminately, irrespective of their long-term prospects. The over-riding emotion is fear.
We also know that, relative to past market shocks, Friday’s stock market reaction to Brexit was relatively mild. For a very good and data-grounded explanation, I refer you to the excellent article written by Spencer Jakab in today’s (Monday, June 27, 2016) issue of the Wall Street Journal (www.wsj.com/articles/why-brexit-is-no-lehman).
Finally, we know that the fundamental health of the US economy is not likely to be threatened by the decision of British voters to leave the EU. For the year-to-date through April 2016, according to the latest US Census Bureau trade release, the UK was the United States’ seventh largest trading partner, behind Canada, Mexico, China, Japan, Germany, and South Korea. Trade with the UK accounted for just a little over 3% of total US trade volume.
While it may be unsettling, Friday’s stock market rout won’t go down in history as anything more than a short-term, fairly moderate reaction to a one-time event. This is not to say that there won’t be short-term pain over the next few days or weeks. The key to long-term wealth accumulation remains unchanged: stay in for the long-run. Do not allow short-term market set-backs establish your long-term strategy.