On Thursday, the British people voted to exit the European Union. Hence the term “Brexit.” That vote promptly sent many European stock markets (the United Kingdom France, Italy) tumbling between 3 percent and 12 percent. In the U.S., the Dow Jones closed down more than 600 points, shaving off 3.4 percent of its value.
Britons’ vote to leave the E.U. caught many observers — and the markets — by surprise. As late as Wednesday, both pollsters and odds makers were giving a significant edge to “Stay.”
What does this stunning vote, and its fallout, mean for the American economy and your portfolio? Here are the five most common questions I’m getting right now:
1. What does this mean for U.S. markets?
History provides some excellent context on this question. The majority of "crisis events" in the past century have led to significant buying opportunities. From 1907 until today, there have been 51 events that led to large market sell-offs. Among these were the Panic of 1907, World War I, Pearl Harbor, the Cuban Missile Crisis, the Arab Oil Embargo, Financial Panic of 1987, the Asian stock market crisis in 1997, the September 11th terrorist attacks, and the collapse of Lehman Brothers in 2008.
The average down draft from the initial reaction was an average 6.7 percent. However, 22 days post-market sell-off, markets were up 3.7 percent on average. Then 63 days later up an average of 5.2 percent and 126 days, 8.9 percent higher.
So, in most cases, time quickly heals these wounds. The market digests change and look to the future.
2. How will this impact my 401k or retirement plan?
The answer depends on how your 401k is invested. If it contains a mix of U.S. stocks and bonds, the impact of this current market sell-off will be mitigated. However, if you have international holdings, or target date funds that are typically heavily weighted to international markets, know that your next 401k statement may look disheartening.
3. What does this mean for the U.S. economy?
The impact on the U.S. economy, short-term and long-term, should be minimal. I like to judge the structural health of the economy by a bundle of measures we call CHIME. For the most part, these indicators remain positive:
- Consumer Spending – Trending up 4 percent during the second quarter.
- Housing – Existing home sales are at their highest level in more than nine years.
- Interest Rates – Money remains cheap, and the Federal Reserve, already hesitant to raise rates, will likely put any hikes on hold in the wake of the Brexit upheaval.
- Manufacturing – This trend has turned toward expansion and is well above where we began 2016.
- Employment – Despite a shaky most-recent jobs report, jobless claims remain low and unemployment is at a tolerable 4.7 percent.
4. What's next for the UK?
Remember that leaving the European Union is a long and complex process. Technically there’s no precedent for a member country to detach itself from the E.U. The exit process could take 2 years or more.
Britain’s exit is widely expected to pull the U.K. economy into recession and could shave off as much as 6 percent of GDP by 2030 or the equivalent of $6,000 in annual cost to households. This does not mean other economies will take a significant hit, as the U.K. share of world GDP is less than 4 percent.
5. What should I do now as an investor here in the U.S.?
Make no mistake, the Brexit vote and resulting uncertainty will send global markets spinning for several days or weeks. If you are still several years away from retirement, press on and continue to save and invest in your company or individual retirement plans. Market pullbacks like this make for buying opportunities, despite the fear and anxiety that are generated by the news. Don’t let the doom and gloom headlines you’ll see in the coming days scare you.
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