Welcome to Brexit

Friday, June 24th, 2016

“The endless threats about trade deals and GDP per capita from the EU…, instead of cowing the British people, seem merely to have excited their bloody-mindedness. They recognize that they might indeed take a short-term financial hit, but there are some things more important than money.”

Andrew Roberts, British historian, in his Bradley Prize speech at the Kennedy Center, June 15, 2016

Yesterday’s vote by the British electorate to end its 43-year membership in the European Union seems to have taken just about everybody by surprise, but the aftermath could not have been more predictable. The uncertainty of how Europe and Britain will manage a complex divorce over the coming decade sent global markets reeling today. To put this in perspective the following chart summarizes global market returns for not only the day, but for the past week as well as year-to-date through market close today. 

Brexit ChartThe important thing to understand is that today’s market drop is for the most part an emotional response to the uncertainty of what lies ahead as a result of the vote. It will be a long process that will be managed by reasonable people, in the UK and Europe, who are interested in preserving and improving their nations’ economic fortunes.

What happens next for Britain and its former partners on the continent? Let’s start with what will NOT happen. Unlike other European nations, Britain will not have to start printing a new currency. When the UK entered the EU, it chose to retain the British pound—that, of course, will continue. Stores and businesses will continue accepting euros.

On the trade and regulatory side, the actual split is still years away. One of the things you might not be hearing in the breathless coverage in the press is that the British electorate’s vote is actually not legally binding – and it will not be until the British government formally notifies the European Union of its intention to leave. With the resignation of British Prime Minister David Cameron, notification will be delayed until the British select a new prime minister sometime this fall. 

After notification, negotiations begin which will include new trade relationships, how open the UK borders will be for travel and various hot button immigration issues. Estimates vary, but no one seems to think the process will take less than five years to complete. Meanwhile, the UK remains part of the Eurozone.

How does this impact the U.S.? For the most part very little. It is important to remember that the UK represents only 2% of the global GDP. Meanwhile, key U.S. economic reports issued this week continue to reflect that our economy is growing with lower unemployment and only a slight increase in inflation. “There is a good chance that the U.S. could finish the second quarter with a real GDP growth of 2.5%,” says Dr. David Kelly, Chief Global Strategist at J.P. Morgan. 

You can bet that, long-term, everyone will find a way to move past this interesting, unexpected event without suffering—or imposing—too much damage. Meanwhile, hang on, because the market roller coaster seems to have entered one of those wild rides that we all experience periodically. Never trade in an emotional market.

Think diversification. Think high quality. Think long-term.