Brexit: Is It Something to Worry About ?

The term Brexit refers to the referendum vote in the UK to decide whether their country should remain as a member of the European Union (EU). The June 23rd vote was subject to constant political and media campaigns designed to “inform” voters. Once tabulated, the “leavers” were victorious and the British exit was confirmed. It appeared that the leavers were sending a strong message–they wanted to recapture sovereignty and had grown intolerant of the immigration policies within the EU…and they were willing to swallow the sour economic pill that would ensue while in pursuit of change.

As unsavory as it sounds, global investors literally gambled on the outcome. By gauging the market reactions to the results of the vote, it was clear that powerful investors took positions on the wrong side of the equation. Accordingly, the global stock and bond markets became very volatile. Domestic stock markets dropped over 5% while indices fell over 10% in some countries. The British currency, the pound sterling, fell to 30 year lows while the US Dollar strengthened and Treasury bonds became sanctuary for nervous investors. Consequently, the yield on US Treasuries had dropped to record lows (as capital floods into Treasuries, yields drop). Within days of the financial spasms, many stock markets bounced back as investors parsed the possible immediate and longer-term impacts.

So a few weeks after the Brexit vote, what does it all mean to you? First, it’s probable that direct, adverse consequences may befall Britain for quite a while; most immediately because of the deflated value of the pound sterling. Also, imports and travel will become more expensive. The effect on commerce between Britain and the EU has yet to be seen, though many speculate that Britain will suffer some level of economic hardship for years to come. Early rumors have also surfaced that EU banks may face another crisis.

As implied above, it seems that US citizens will bear only indirect, yet material, effects. For example, complete separation from the EU could take two years or longer. Along the way, we should fully expect problems and hiccups that the investment markets will consider unsettling. US businesses that export products abroad may struggle with earnings since the strong dollar makes those products more expensive. Reverberations from the export issue could spread into many layers of our economy and will likely spill over to the stock market causing greater, chronic volatility. US imports and travelling, especially to Britain, should become more affordable. Very important short-term is that mortgage and financing rates have dropped as the falling Treasury yields have pulled those down, too. Brexit may evolve to become synonymous with Dunkirk. And like Dunkirk, positive catalysts for the future, while unrecognizable at the time, were nonetheless forged.

Toomey Investment Management a boutique wealth advisor firm partnering with mid to high net worth individuals, families and businesses.