Brexit aftermath Part 2

By Gary Silverman, CFP®

Last week I outlined some of what is going on with the U.K. leaving the E.U. I left you with the question: How does the U.K. departing the E.U. affect the U.S.? Today we consider it.

The long-term answer is: Not much. Short-term, several things are going on. Folks who are concerned about the U.K. and Europe in general will likely shun their currencies. We’ve seen that in the plunge that took place after the vote for both the Pound and the Euro compared to the Dollar.

When we have a strong currency it means that our dollar can buy more goods than it could before. That is, obviously, good if you are buying things. But it also means that it will take more of somebody else’s currency to buy something from us. That’s bad if you are exporting things. But that doesn’t mean you can make a blanket statement about U.S. companies being hurt. The cycles of buying and selling between folks can be involved and complicated so this needs to be examined on a company by company basis. Some will be hurt while others will be helped.

 If you own stock in European companies you might see a double-whammy pushing down price. That’s because of the general fleeing from those stocks making them sell cheaper and the currency movement making them seem even less expensive. Silver lining: Trips to Europe should get cheaper…time to check your passport.

You savers out there hoping that the Federal Reserve will continue to increase rates and help your savings and CD returns need to keep on hoping. The Fed will be even less likely to raise rates than they were before with the increased volatility in the world markets and the strong dollar. If you’re more the borrowing type then you’ll be happy in that borrowing rates should stay low for a while longer.

But perhaps the biggest effect is the hardest one to predict accurately: Human confusion. People will see this E.U. thing that they don’t understand go through a change they don’t understand and hear a myriad of explanations that they don’t understand (including this one, possibly).

Things will stay volatile for a while. Maybe quite a while. One day people will think things are getting better and stocks will soar. The next day, they’ll think that a tsunami is working its way to shore and it’s time to run for the hills. Personally, I don’t think this move by the U.K. will have anything more than a passing ripple across our economy. Not to say you’ll enjoy the ripple.

European countries will have their rowboats tossed around by some waves, with many people sure that the end is near. If memory serves me right, that entire area of the world went through two world wars resulting in destruction, mistrust, and animosity that lasted generations. Yet in the end, including this time, the waves eventually flatten out.

This article was published in the Wichita Falls Times Record News on July 10, 2016.