Market uncertainty appears to be the breaking news this morning, as the United Kingdom (UK) voted to “leave” the European Union (EU), more commonly known as the “Brexit”. The European Union is a unified monetary and economic body of 28 countries who are each an independent fiscal and political entity. The EU has the advantages of a large unified trading area but the disadvantages of political conflict between its members. Its purpose is to unify the member countries economically and eliminate border controls of both trade and people. The UK is one of the most politically and economically prominent countries in the EU, being the 3rd largest contributor.
The majority of British citizens decided to vote their concern over the free movement of immigrants and refugees, along with the budgetary constraints imposed on them, such as when the EU leaders assured investors it would stand behind its members’ debts, a.k.a. Greece. As with any monetary and political change in the global economy, there is an effect on the global market.
This morning, as Great Britain voted to leave the European Union, the markets responded dramatically. The UK equity index futures slumped and the pound sterling has dropped. On the other side, U.S. Treasuries are seeing investor demand and the dollar is increasing. For the U.S. it sounds appealing. However, as the dollar rises, equities tend to drop. It’s a complex model to comprehend. To quote an article this morning from CIO Weekly Perspectives, “we need to look through the noise to the fundamentals. The vote will probably exert only a marginal effect on global economic fundamentals, which remain stable but weak.”
This was not a surprise vote, rather a surprise outcome. Fund managers have had ample time to plan a buffer against the volatility. However, we as investors should expect some volatile trading days in the interim, especially in the near future. And with that volatility in the market there will be opportunity for patient investors. As history has taught us, stay the course, buy when the market is down, stay diversified, control your emotions, and if you aren’t in the market during the ups, your return will suffer.
- Written By Pamela Smitson, Worley Erhart-Graves Financial Advisors