What the heck is a Brexit and why is it crushing our stock market today?

As my clients know, I don’t encourage anyone except investment professionals to follow the daily ups and downs of stock markets. In the long run, daily swings don’t matter.

That said, on days when the volatility is extremely high, like today, I think a little insight and an extra dose of reassurance can be warranted. So, here are some quick thoughts on what’s happening today in the markets:

Brexit is short hand for British exit, or more specifically, Britain exiting from their participation in the European Union. A nationwide vote was held yesterday in Britain and although it was close, to the surprise of many, the citizens voted to exit from the EU.

OK. So why is a vote in Britain sending shock waves through stock markets worldwide?

It’s complicated, but first, we have to remember that the economic reality is that we live in a highly interconnected, highly interdependent global economy. We can argue the merits of that connectedness, but it is the current reality. For many decades, the world has become more tightly integrated, not less, so the impact on one part of the overall system will impact the others.

The second issue is that investment markets don’t like uncertainty. We typically see downward spikes in the markets when global events “spook” the market and this vote to exit is no different. The outcome of the vote has led many to fear that undesirable events are now more likely to happen.

So what undesirable events could happen?

- Britain accounts for 3.9% of world output. That’s not a huge portion, but it is meaningful in context of the interconnectedness.

- Britain could fall into a recession and the U.S and Chinese economies that are somewhat precarious could also falter.

- Corporate investment and trade may decrease as firms worry about trade regulations.

- Consumer angst may increase and consumer spending may decrease and that may further hurt corporate profits.

- Then there is the possibility that other EU countries may also vote for independence further destabilizing the situation.

And then there are other uncertainties related to currency markets and corporate reactions that could also unfold in undesirable and unintended ways that the market would react negatively against.

It’s also possible that Britain quickly and efficiently addresses the trade and currency worries and perhaps juices their economy with some stimulus, and none of the doomsday scenarios come to pass. In that case, the reaction seems overblown.

But, that’s the nature of investing. It's unpredictable.

Should you be worried? Only if your portfolio isn’t aligned to your risk tolerance. Otherwise, relax and read stories about the thrilling conclusion of Dizzy the monkey’s escape story.

Markets like this can test investor risk profiles. At J. Bradford Investment Management, we are constantly monitoring the markets and the global macroeconomic environment, and many of our clients are in portfolios specifically designed to reduce the downside risk of markets like this.

If you would like to discuss the Brexit in more detail or discuss other aspects of your portfolio, please schedule a free consultation.

 

PLEASE REMEMBER:

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial Advisor and Investment Management Services provided by J. Bradford Investment Management, Nashua NH.