The United Kingdom’s decision to leave the European Union rattled equities markets and currency markets Friday. What should an investor do in its wake?
Perhaps nothing at all.
The Brexit is definitely momentous. It represents a crisis for the E.U., and it has already forced the resignation of U.K. Prime Minister David Cameron. The U.K. will have to negotiate new trade agreements in the near future. Scotland and Northern Ireland (both of which voted against the Brexit) could seek to leave the U.K. in protest. Other nations could try to stage exits of their own, leaving the euro area even smaller and weaker.
We have seen significant turbulence as an effect of the vote, and that volatility may impact the markets for days, perhaps weeks as the Brexit story continues to unfold. Households investing and saving for retirement and other long-run financial objectives should view the turbulence with an understanding that it is a short-run market disruptor, not the state of the market for years to come.
The Brexit will be gradually negotiated over a period of two years, perhaps longer. So in the interim, the U.K. will stay in the E.U.’s free trade zone, and corporations doing business in the U.K. and the euro area will remain focused on revenues and profits.1
Retirement savers should not react to the Brexit emotionally. Institutional investors may buy on the dip. Central banks can certainly act, if needed, to stabilize financial markets. The Federal Reserve may refrain from raising interest rates for some time – in fact, after the Brexit vote, traders put low odds on a 2016 rate hike.2
If you look up the word “momentous” in a dictionary, you will see it defined as an event of great importance or significance, especially with regard to the future. The root of “momentous,” however, is the word “moment,” meaning something fleeting, temporary, and brief. All that is worth remembering; this moment, too, shall pass.
M. Kathryn Clark, AIF®
1 – usatoday.com/story/money/2016/06/24/dont-let-brexit-spook-you-investment-advisers/86340196/ [6/24/16]
2 – cnbc.com/2016/06/24/fed-rate-hike-off-the-table-for-rest-of-2016.html [6/24/16]
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