Britain voted on June 23 to leave the European Union (EU). In response, stocks dropped, bond prices rose (lowering interest rates further), and the value of the British pound fell sharply. Markets hate surprises and uncertainty, and this vote provided both. However, keep in mind, the impact of Britain's vote isn't likely to be as big as the market reaction. That's why we think you should stay invested and, where appropriate, consider adding quality investments at lower prices.
What's the Impact of Britain's Vote?
The U.K. is about 4% of the world economy, and it doesn't leave the EU immediately. So we believe the economic impact is likely to be much less than the market reaction suggests. While the U.K. starts to renegotiate its trade and economic relationships globally, its current ties to Europe and the world remain unchanged. U.S. companies will continue to operate in Britain as before, and British companies will continue to participate globally.
There are forecasts that Britain could go into recession as decisions are delayed and uncertainty remains high, but we think that's unlikely to cause a global recession because the impact on other countries remains relatively small. In addition, political uncertainty in Europe has increased, since there could be similar votes in other European countries as well as increased worries about the future of the EU and eurozone.
Lessons for Investors
U.S. markets have joined the global reaction to the surprise British outcome. Stocks have declined sharply and bond prices are higher, reducing interest rates. But the U.K. vote makes little difference for many U.S. companies and investors, so don't overreact. Here are three main lessons to keep top-of-mind:
1. Predictions are frequently wrong. As voting ended, polls showed Britain would vote to remain in the EU. Instead of making investment decisions based on predictions or polls, make sure your investments are well-positioned for a variety of outcomes. That's also the case for predictions about the impact of the British vote. An appropriate mix of well-diversified stocks and bonds, including international investments, can help your portfolio navigate global and political uncertainties.
2. Markets move faster than fundamentals. Over time, rising stock prices are supported by economic and earnings growth. But stock and bond prices rise and fall more quickly than those fundamentals, especially when fears and uncertainty are rising as they are now. The fundamentals remain positive, and slow economic growth has been improving worldwide. U.S. economic growth is expected to continue at 2%-2.5%, and Europe's economy expanded by 2% in the first quarter. Focus on the fundamentals, not short-term market moves.
3. Your financial goals haven't changed. It's natural to be concerned when stocks drop. But in many cases, you don't need to do anything. Stay invested - your portfolio has been constructed to help you stay on track toward your financial goals in difficult markets. Consider adding international stock investments as well as U.S. stocks, if appropriate, to take advantage of the drop in price of many quality companies.