Last Thursday the British decided to end their 43-year marriage to the European Union. Uncertainty over how this divorce will be handled has sent European and US markets tumbling (with the exception of the Hang Seng, markets in Asia were actually up on Monday).
The FTSE 100, German DAX and CAC 40 were all down Monday and all major U.S. indexes were also lower (markets rallied on Tuesday). The British pound also took another beating versus the dollar on Monday, reaching a 31-year low of $1.31. So where does it go from here?
Despite this poor market performance, remember the current global reaction is more emotional than economic. Uncertainty is playing a huge role driving investors to dump bank stocks; are Citi and Deutsche Bank really any less valuable than they were last Friday? However, when all is said and done, wise investors will see this knee-jerk reaction to Brexit was really a buying opportunity. The investors who “sold out” will have to go back to the drawing board at what are likely to be higher prices.
Another interesting twist to the divorce; the Brexit vote is not legally binding. Until the British government formally notifies the European Union of its intention to leave under Article 50 of the Treaty of Lisbon, no departure will take place. Since Prime Minister David Cameron has officially resigned, it’s unlikely anything will happen until a new prime minister is chosen in the fall.
If a formal notification does take place, Article 50 will kick off a two-year period of negotiations between the UK and the EU (some think it could be as long as five years). Even if the Brexit vote holds, it will be a long-term process, negotiated by intelligent people who wish no harm to their respective national economies. The bottom line is that, for now, the UK is still part of the European Union.
Unfortunately, it’s likely that market volatility will continue in the near future due to Brexit, but a globally allocated and properly diversified portfolio—similar to one BlueSky Wealth Advisors’ designs for our clients—should weather the storm.