The Markets are Panicking Over the Brexit Vote. You Shouldn't.

Jun 24, 2016

In a vote that will reverberate throughout Europe and beyond, Britons chose to leave the European Union—a partnership among more than two dozen nations that won the Nobel Peace Prize in 2012 for its role in bringing peace and democracy to the region.

The reaction to Thursday's referendum was as swift as it was unsettling.

* The British pound plunged to a 30-year low amid concerns that "Brexit" will hobble an already troubled U.K. economy. After the vote, I.H.S. European economist Howard Archer immediately lowered his forecast for U.K. GDP growth from 2% this year to 1.5%; and from 2.4% in 2017 down to just 0.2%.

* Gold prices jumped to a 2-year high, as fear and confusion were running rampant Friday morning.

* Stocks in Japan sank 8% in overnight trading. Trading was actually halted on Japan's Nikkei futures exchange. In Tokyo, investors fear that a loss of faith in the British pound and the euro will only strengthen the yen, making Japanese exports more costly to foreign buyers.

* German stocks shed 10% of their value early Friday while the London FTSE index sank nearly 8%. Investors are simply unsure what the real political and economic fallout will be. British prime minister David Cameron, who lobbied for Britain to remain in the European Union, announced this morning that he planned to step down from his post by October.

* U.S. stocks followed the global markets down Friday morning. In early morning trading Friday, the Dow Jones industrial average plunged 500 points.

"We believe markets will likely react in a severe negative fashion over the near term," said Brian Belski, chief investment strategist for BMO Capital Markets, in a note on Thursday. "The environment could be eerily similar to that of late summer 2011, a period when European debt fears flared up and S&P downgraded the credit rating of the U.S., leading to all sorts of doom-and-gloom prognostications with U.S. stocks selling off sharply as a result."

There is good reason for Brits to be afraid.

Take a recent report from the International Monetary Fund, which laid out two scenarios for the U.K. following a vote to leave. In the first, Britain quickly agrees to a new set of trade deals with E.U. member nations. In the second scenario, it takes longer for Britain to hammer out such deals.

The first scenario would result in unemployment rising slightly; the value of the pound dropping 5%; and economic growth rising less than expected this year. In the second — and more likely — scenario, unemployment jumps two percentage points, inflation returns, and the U.K. economy slips into recession.

But why should American investors care what happens over the pond?

Read Next: 5 Reasons Americans Should Care About the Brexit Vote

As my colleague Paul Lim has pointed out, U.S. investors have a lot to be worried about. The stock market volatility, already up, will increase, eroding confidence and forcing bad decisions made in haste. The dollar's potential rise against the pound and euro would make U.S. exports less competitive, hurting companies and their employees here at home.

And what if this is the beginning of a broader E.U. crackup? Member states like Spain, Portugal and Greece have suffered through unbelievable economic pain following the great recession because they, unlike the U.K., don't have their own currency. With unemployment around 20%, could Spanish voters use the Brexit vote as a beacon?

This is all very much possible — and very much speculative.

That's why you'd be wise to not overreact to the U.K.'s unprecedented decision, despite valid reasons for concern.

"We believe any Brexit-related weakness should be viewed as an excellent buying opportunity, particularly considering trends are a bit better" than in 2011, Belski said.

And while the U.S. economy would face the headwind of a potentially stronger dollar post Brexit, there is a potential tailwind to consider. All of the global uncertainty surrounding the vote means the Federal Reserve will probably keep short-term interest rates where they are until at least December, said UBS economist Maury Harris.

Of course, no one knows what the future holds. But you'd do well to resist the urge to buy or sell anything because of Thursday's Brexit vote. In fact, turn off your screens on Friday and head to the beach, if you can. In the long run, your 401(k) will thank you.

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