‘Brexit’ causing stock volatility
Published 3:00 am Wednesday, June 29, 2016
Stock markets around the world, including America, have been reeling after the United Kingdom (U.K.) voted Thursday to leave the European Union (EU).
Britain’s decision to exit the EU, which is being referred to as “Brexit” for shorthand, has caused panic in the global market. For instance, Dow Jones dropped 1,000 points in the two days following the vote, and other stocks dropped as well.
Local Edward Jones financial advisor Kenneth Green says that the long-term outlook for investors is not as bad as it might seem.
“Keep your focus on the long term,” Green said. “If Brexit-inspired volatility does go on for a while, keep your focus on your long-term financial goals, which have not changed. By staying focused on the ‘far horizon,’ so to speak, you’ll be less tempted to make short-term moves that may not be in your best interest.”
Just three business days after the U.K. chose to leave the EU, stocks have begun to rebound. Dow Jones closed up 269 points and many other stocks rose as well.
“Financial markets dislike uncertainty, which is why they fell so sharply after Brexit,” Green explained. “But the markets move much faster than the ‘fundamentals’ that actually drive stock prices – and, despite Brexit, these fundamentals remain generally positive. In the U.S., economic growth is expected to continue in the 2 percent to 2.5 percent range, and the prospects of a recession remain small. U.S. companies will continue to operate in Britain as before, and British companies will still participate in the global economy.”
One of the things that experts say may provide stability is the amount of time it will take the U.K. to actually separate from the EU. Dr. Steven Taylor, dean of the College of Arts and Sciences at Troy University, explained the process in a news release Friday.
“The Brexit vote does not immediately remove the U.K. from the EU,” Taylor said. “Rather, it provides a political mandate for the British government to do so. In fact, the formal procedure to exit the EU requires the evocation of Article 50 of the Treaty of Lisbon. This would have to be triggered by the prime minister and would launch a process of negotiation with the EU for the exit of the U.K. This process will require extensive negotiations. The U.K.’s exit from the EU will take at least two years.”
Green explained what this meant for investors. “This extended time period can give financial markets a chance to absorb the new reality – while giving investors time to ponder their long-term strategy,” he said.
Further volatility may be on the way though, as Scotland voted to remain in the European Union and is threatening to seek independence from the U.K., which nearly happened in 2014. With Brexit likely to have a continued impact on the global economy, Green explained what investors can do to limit any negative effects.
“Review your investment portfolio – and look for opportunities,” he said. If you’ve done a good job of building a diversified portfolio that’s based on your individual needs, goals, risk tolerance and time horizon, you may not need to take any action in the immediate aftermath of Brexit. Diversification is especially important, because it’s possible that some financial assets may be more negatively affected by Brexit than others; you can blunt this impact by owning a wide range of investments.”
Brexit has caused some concern that other members might leave and cause the EU to collapse. But Taylor doesn’t expect that to happen.
“In my opinion, the EU will remain intact,” Taylor said. “Given the immediate and obvious negative economic impact on the U.K. (which is likely to continue, and perhaps deepen), I suspect that EU members will be quite reluctant to go that route.”
The EU is made up of 28 countries (27 once the U.K. leaves) and is the second-largest single market in the world. Taylor explained how the EU works.
“This is an arrangement in which all of the member states share common external tariffs (i.e., taxes on goods coming into that market) and allows the free flow of goods, services and labor internally,” he said. “So, just like all trade agreements entered into by the United States affect all the U.S. states equally, so too does the EU enter into, and enforce, trade agreements.” The big difference, Taylor said, is that the states are all part of one country, while the members of the EU are all sovereign countries.
Whatever happens, Green encouraged investors that the global economy will move on past the event. “We’ve gotten past bigger events in the past, including wars and other political crises, and we’ll get through this one, too,” he said. “As the British themselves famously posted on their walls during World War II, ‘Keep Calm and Carry On.’ That’s good advice for investors, too.”