Brexit and Bregret? Just Brelax

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club


Editor’s Note: The aftermath of last week’s Brexit vote left investors puzzled and panicked about their nest eggs. And we know our readers are waiting for cues on what to do next. If this sounds like you, be sure to check out Marc’s latest episode of Oxford Club Radio. His guest, Frank Holmes, CEO and chief investment officer of U.S. Global Investors, discusses Brexit’s impact on gold, stocks, bonds and global currencies. Click here for more.

Global markets recoiled in horror last Friday after British citizens voted in favor of leaving the European Union.

It’s not surprising that markets fell hard. The results of the vote were not expected, and markets don’t like surprises.

But what does Great Britain’s exit from the EU have to do with you? Maybe more than you think.

Let’s take a look at how Brexit may affect you.

Perks of a Plunging Pound

The cost of a trip to Europe just got a lot cheaper. The British pound fell by as much as 10% on Friday. It will likely fall further. So if you’ve been dying to see a show in the West End, watch a Manchester United football match or visit a pub for bangers and mash, start looking for deals.

Assuming the pound remains weak against the dollar (and other currencies), you’ll get a lot more for your money in England than you would have just a month ago.

And it’s not just the U.K. where the dollar is strong. The euro is also weakening, making travel in Italy, Spain and other European destinations more affordable.

Additionally, political turmoil in Europe should help keep interest rates low, both there and in the U.S., which makes money incredibly cheap for borrowers. Today, most anyone can get a mortgage rate under 4%. Those with excellent credit can get one as low as 3.25%, and it may go even lower.

Shockwaves for Your Portfolio

But low interest rates are killing savers. The days of 4% yields on savings accounts are long gone. Investors who need to keep their cash safe and liquid are lucky to get more than 0.1% on their money.

Brexit will likely keep pressure on U.S. interest rates as investors around the world flock to dollar-denominated assets. This should inflate the dollar and make American goods more expensive to export. It should also give the Fed another reason to leave interest rates where they are. A rate hike would make the dollar surge even more.

Plus, declining exports would hurt corporate profits, which wouldn’t be good for stock prices.

Uncertainty makes CEOs gun-shy. And this will likely stall their plans to invest in infrastructure and people throughout Europe until they see what the new Europe will look like.

This will put a big drag on the European economy, which is one of the three largest economies in the world. A slowdown in Europe will definitely be felt in the U.S., China and other places.

Brexit will also make traveling between the U.K. and other European countries more of a hassle.

One of the great things about the EU is how easy it is to travel between member countries. For Europeans, it’s a breeze. Even for Americans, once you’re in an EU country, crossing another EU border is a less onerous process than visiting from outside the EU.

That’s about to change. There’s no doubt it’s yet another headwind for the region’s economy.

Questions Remain

It will take at least two years for the U.K. to leave the EU. But remember, the vote was nonbinding, so the British government isn’t obligated to leave.

And with new reports of “Bregret,” it sounds like some Brits are regretting their vote to leave. Some have even called election officials, asking if they can change their votes. Many claim that they voted to leave the EU only as a protest.

So it wouldn’t be a stretch for Britain to stay. The worry could be much ado about nothing, like the Y2K scare.

Or this could be the beginning of the end of the EU, in which case more uncertainty will follow. This should make the dollar even stronger, especially if the U.S. is seen as a bastion of safety.

Either way, it’s going to take a while to see how things shake out. So it’s important not to panic, even if Brexit causes a period of economic or stock market contraction.

Economies and the market have gone through big changes before and, in the long term, stocks go up.

Think about the U.S. and global economy in 1950 compared to today’s. It was very different. We’ve developed interconnected global economies, higher government debt levels, technology and a host of other things.

The market stumbles from time to time. Sometimes badly.

But over the long term, it goes up, no matter how many times it appears on the verge of being upended by geopolitical events.

So don’t freak out about Brexit. In fact, just Brelax.

Good investing,