June 23, 2016
About 10pm last night we got the news that Britain voted to leave the European Union (EU). A relationship that’s been in place since 1973. It appeared this was going to be a wild day in the stock market with indications of a -5% pullback overnight, but as we watched the market open that was reduced to -3% as of the time of this writing (10am).
One reason tensions have eased somewhat is perspective. Mohammed El Erian with Allianz investments, said very succinctly, “…at least it’s not Lehman Brothers.” This quickly puts in perspective the magnitude of this change in comparison to one of the major events of the financial crisis in 2008. No, this event is more like an orderly divorce.
With the long relationship the UK and EU have had the last 43 years it will be a challenge to unravel all the details, but it looks to be a two year process. This just began this morning when Prime Minister Cameron initiated Article 50 of the Lisbon Treaty, just to be technical.
Top three reasons we found 51.9% of UK voters wanted to leave:
- £350 Million pounds per week paid to the EU without the appropriate benefits in return. Eerily similar to the taxation without representation complaint our Colonies made against Britain 240 years ago.
- Over-regulation by the EU which slows jobs, business expansion, and erodes national sovereignty.
- Fears, which grew after Paris and Brussels attacks, the EU is unable to vet immigrants and screen out terrorists.
How will this affect the UK?
It’s likely this divorce will result in a reduction in the UK’s economy due to rising borrowing costs, rising costs of imports as the pound falls to a historic 32 year low, and strained relations with the UK’s greatest trading partners. However, let’s rely on perspective again, the UK is only 4% of the global economy.
How will this affect the global economy?
The outlook in Europe as a whole will be dimmed as other countries consider the same reaction as Britain. France appears to be “NEXIT” to vote on this idea. If they decide to leave we believe it would have devastating effects on the EU and have a major impact on the global economy.
How will this affect my account?
So far this morning our average accounts are only down one-third what the market is, registering a -1% decline (more conservative accounts down less, aggressive accounts down more). We’ve been pouring over our shopping lists and looking for opportunities to invest at these low levels. So far there’s not many screaming buys, but we did make a few add-on purchases of Wells Fargo WFC in accounts that needed it. We’re hoping to find more opportunities if this event creates additional uncertainty in the days ahead.
Thanks for taking the time to read. Please call or email with any questions.
-Tim Porter, CFP®