Last Thursday, the United Kingdom (U.K.) voted to leave the European Union (EU), in a somewhat surprising move. The markets’ immediate reaction was less surprising. Markets seemingly anticipated a “stay” decision and had rallied in the days prior to the referendum, but started to decline after the 52% to 48% vote went the other way. Given the unanticipated decision, it is not astonishing that the British pound fell sharply – briefly to a 30+ year low against the U.S. dollar – and the U.K. equity market followed suit. American equity markets were down about 3% on Friday, while international equity (e.g., Germany and France) and currency markets declined more. Many investors, predictably, turned toward what they deem to be more stable investments like U.S. Treasuries and gold.
Raymond James Chief Economist Scott Brown believes the volatility we’ve seen immediately after the vote reflects the fact that financial markets participants, who had largely factored in a “remain victory,” were caught leaning in the wrong direction. This isn’t a Lehman – type event. It’s a response to a surprise, not an outright panic. While the U.K. economy faces the likelihood of slower growth, financial market volatility should begin to settle down soon.
For now, the dollar is rallying versus the pound and euro, reflecting a flight to safety. Global investors are watching to see how the scope of this major change will impact British economic growth rates over the next few years as well as European politics, currency and economic reforms. Several countries’ central banks have offered reassurance that they will provide liquidity if needed. Because the European Union allows for the easy flow of goods, services, capital and people across the borders of member countries, economists expect the U.K. to now face restraints in foreign trade and global finance, which could have a negative impact on the U.K. economy and currency, according to Brown.
I’m sharing this with you to provide some perspective on the news you’re seeing and to emphasize the importance of knowing what you own as part of a long – term, well – diversified financial plan. Investors poised to capitalize on market movements may see buying opportunities of fundamentally sound investments that could further enhance their portfolios.