Quick, what happened?
You’ve probably been hearing all weekend about the UK leaving the 28 member European Union (EU). David Cameron, the British Prime Minister, announced his resignation as he was in favor of staying in the EU. To sum up his sentiments, he lamented, “I will do everything I can as Prime Minister to steady the ship over the coming weeks and months, but I do not think it would be right for me to try to be the captain that steers our country to its next destination.”
To make matters worse many experts predicted the vote would turn out differently, so this shock rocked the financial markets on Friday.
This process will take at least two years to work through and it is uncertain what the relationship between the UK and EU will look like. Before theBrexit, there were 28 members of the EU and under the terms of the European Single Market Act, goods, services, capital, and people were free to move throughout Europe. The UK will always keep close ties with its European neighbors, but now the process of the defining the relationship begins. Will tariffs be placed on Burberry scarves destined for France? What will happen to the 1.2 million Brits working in neighboring EU countries? Will the EU impose fierce sanctions to discourage other members from defecting? Details like these will be hashed out over the next few years.
- Uncertainty. This is what the market is reacting to right now. Nobody knows what the relationship will look like and on Friday the DOW dropped over 600 points or 3.4%.
- Strong US Dollar. The foreign exchange rate between the USD and GBP dropped 11%. As recently as June 2015, 1 pound cost $1.66 in USD. Now it only costs $1.32, which is the lowest exchange rate since 1985.
- 10-year note. The yield on the 10-year Treasury note dropped to 1.42%, which is the lowest it has been since July 2012. This rate is important because it impacts the rates you receive on your student loans, auto loans, and mortgage.
- Global economic implications. According to the World Bank, the UK represents approximately 3.9% of the world GDP (all the goods and services created in the world), which is relatively small when you consider the global economy. Even if the UK falls into a recession, it is unlikely to spread to the rest of the world.
What this means for you?
Expect increased volatility in your investment portfolios over the short-term. In the long-term, I believe the impact of the Brexit will be muted. Many experts predict that the long-term impact for the UK will result in slower economic growth for the Brits. However, as the economic output of the UK represents less than 4% of global GDP, even if the UK economy goes down the drain, it is unlikely this will result in a global meltdown.
Interest rates remain stubbornly low and it is unlikely that the Fed will raise interest rates in September. Reminder, the Fed has only raised interest rates once since 2006 with the hope to stimulate the economy. To take advantage of low interest rates, now is a good time to refinance your outstanding debts like student loans or your mortgage.
Have you been wanting to visit Big Ben and experience high tea? Given the strength of the USD, now may be a good time to hop across the pond to visit the Queen and see Stonehenge. Your dollar goes 20% further compared to one year ago.
Given the recent events in the UK, and the fact that we are halfway through 2016, now is a good time to review your investment strategy. Ask yourself: Is my portfolio optimized for long-term growth? When was the last time I rebalanced my accounts? I believe the negative economic impact of the Brexit is over-hyped, but we can use this as a trigger to review your holistic investment strategy and make sure you are tracking towards your financial goals.
Need some help creating a long-term investment strategy or want to discuss how your investments fit into your overall financial life? Set up a time for a complimentary 60 minute consultation.