What do we need to know about the shocking development of Britain leaving the European Union?
Mellody: This is a historic event and it will have broad economic and political consequences in the UK, Europe and here in the United States. First, a little background on the subject. To deal with political pressures ahead of the 2015 parliamentary elections in the UK, Prime Minister David Cameron pledged to hold a referendum on a British exit from the European Union if his party won. They did win, and the referendum was scheduled. Few thought there was a chance the vote would succeed. On Thursday, they did just that. This morning, i want to talk about what that means around the world, and for our listeners here in the U.S.
What does it mean overall?
The immediate global implications will include incredible volatility in markets around the world for some time. As we know, markets loathe uncertainty, and very few single events can match this for uncertainty. Some are describing this as a magical mystery tour. After all, a country has never left the EU before, so we are really in uncharted territory here. And the markets are certainly reflecting that. The London stock exchange closed down more than 3% on Friday and could drop much further. Other international exchanges around the world, especially European and Japanese markets, closed down sharply as well.
In the medium term, it is really hard to foresee all of the impacts. After all, the UK-EU divorce process could take up to two years, which means two years of potential economic landmines. Think of this as a very messy divorce. This is a recipe for slower growth in Britain and Europe. Britain’s banking and financial sector will certainly take a hit, and companies that export to the UK will do, as the weaker British pound makes imports much more expensive.
How about here in the U.S? How will the economy and the markets be affected?
Obviously, the markets have reacted poorly, as expected. Again, this is uncharted territory, which is a recipe for market chaos. We are likely to see very heavy trading, over the next few days and perhaps weeks, and Wall Street could see negative movement during this time as investors try to parse out exactly what this means for U.S. companies and the broader economy. Most American corporations do not have huge exposure in the UK, but some do, including Ford, Xerox, Ebay and others.
We are also likely to see slower economic growth here in the united states as key economies in Europe drag down growth here, and a stronger dollar making it harder for U.S. exporters. The Brexit vote almost certainly puts an interest rate hike on the back burner until 2017. Overall though, it is important to put this in context. This not like what we saw in 2008 or other big economic downturns.
For those of us concerned about our retirement portfolios, what should we do?
That’s a very important question. And here is what you need to know: in times of great market volatility, don’t do something, just stand there. It is counterintuitive, but the best thing you can do is hold tight, and ride out the storm. Whatever you do, do not panic. While this looks bad, remember that the markets are simply making adjustments to this event. That is what they do. But we are not likely to see a long-term decline as a result of this. Also, remember the markets look most closely at the fundamentals of the stocks, and this will not negatively affect the health of too many American companies in a big way. That is not to say that companies that have significant exposure to British and European economies won’t be impacted, but this is not a long-term doom and gloom scenario. On a positive note, if you continue to contribute to your portfolio, the short-term negatives could mean stocks are better deals. But whatever you do, do not rush to try to time the market or react to this emotionally. That is the worst thing you can do.
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
Money Mondays: What Is Brexit And Why Should You Care About It? was originally published on blackamericaweb.com