Brexit Roils the Markets

The biggest news in markets across the world was the British vote to pull out of the European Union after some 43 years as a participant in the EU (and the former Common Market). It’s estimated that global markets lost the equivalent of $2 trillion in value on June 24, when the results of the Brexit poll became clear. In the United States, the Standard & Poor 500 Index took a dive, plunging 76 points or 3.6 percent. The Dow Jones Industrial Average did the same, falling 611 points or 3.4 percent, and the Nasdaq Composite dropped 202 points or 4.12 percent.  Here’s an overview on what Brexit means for the United States.

How will this affect the United States?

The U.S. markets’ losses represent some $675 billion in market value, which erased all the year’s gains to date. On the other hand, U.S. currency and bond markets saw a surge as investors fleeing the Brexit-induced turmoil turned to alternatives outside Europe. The U.K is not the most important U.S. trade partner – ranking 5th or 6th behind other nations. However, in an age of global connectivity, U.S. markets, the financial industry and various corporations will be affected to some degree by what plays out in the U.K and in Europe as a whole. Some thoughts to consider:

• The immediate dramatic response to the Brexit poll was generated by two main catalysts – uncertainty and surprise. The markets hate uncertainty, and right now everyone is in unchartered territory. To a large extent, the sell-off in the markets resulted from the shock when investors, who expected U.K. voters to vote to stay put, realized they were wrong.
• No one knows how long the sell-off and other market shocks will last. We are dealing with situations that have no precedent. Volatility in U.S. markets might continue, but Wall Street gurus are urging investors to be patient and stay the course.
• Many investment experts hope the initial reaction on the exchanges will be short lived.  Many expect this to be more of a shock to the U.S. exchanges than a factor that could precipitate a full-blown crisis. That being said, some economists believe the U.S. economy might see gross domestic product decline somewhat, possibly losing as much as 0.6 percentage points over the next 12 months.
• Some analysts believe a dismal outlook for European stocks in the medium term could help U.S. stocks to rebound – but not immediately.
• Economists predict tighter financial conditions amongst industrialized nations. In the United States, that suggests the Federal Reserve won’t hike interest rates anytime soon. Some analysts think there might be a chance of a hike in December; others believe it won’t happen until 2017.
• London’s role as a major hub of world finance is expected to be diminished by the pull-out from the EU. Other major financial centers – including New York – could benefit from London’s shrinking role in the international capital markets.

The U.K.’s exit from the EU will be a complicated and lengthy process. It will be some time before the full ramifications for the British, Europe and the global economy can be understood and measured.

The discussion points above are general in nature and are not intended to replace advice from professional tax and investment specialists.

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