​Brexit?

After a referendum on June 23, Great Britain became the first country in the European Union's (EU) 60- year history to leave the EU bloc of nations. This is a significant decision which has consequences for financial markets, the economy, politics, and business. The vote, which is not legally binding until Parliament invokes Article 50 (which represents formal notification of leaving the union) has sparked concerns about the impact of "Brexit" on global economic growth and spawned volatility across financial markets worldwide. There are countless views of the consequences. We want to share our answers to some questions and provide some perspective.

Why was there such a strong market reaction? Markets have a history of moving before "market moving news" is finalized. So in a sense, markets tend to predict what is going to happen. Normally someone knows what is about to happen, and secrets are hard to keep! In this case, the expectations of the investment world were wrong. Since markets don't like uncertainty or surprises, the reaction was sharp and fast. 

Why did Britain vote to leave the EU? While all voters have their reasons, some common themes were the EU requirements allowing immigration, requiring accepting refugees, fees paid by Britain to the EU, and having unelected leaders in Brussels (the EU headquarters) making rules for Britain to follow. 

How did the vote split? There seem to be 3 distinct splits, geographic, economic, and age-based demographics. Scotland, Northern Ireland, and London were for remaining in the EU while the rest of the country was for leaving. If you were wealthier or younger, then it's likely you voted for remain, while less affluent and older individuals voted for leaving. 

A surface analysis does show a few of the reasons. Scotland and Northern Ireland seem somewhat less loyal to Britain and identify with being European. London and the other demographics seem to have been direct beneficiaries of the EU while the benefits to other groups were less direct. London certainly benefits from being a center for EU company creation and financial services. Wealthy individuals benefit from the ease of travel, and the young from an ability to seek employment anywhere within the EU. 

Why are people worried? We can't summarize all the reasons but here are a few. 

• •  This could lead to populism and other countries leaving the EU. So more uncertainty. 
• •  This could cause a slowdown in companies expanding since they don't know how the changes will affect them. In a global economy, a slowdown in one area can infect other areas. 
• •  The transition could be over a few years which could lead to prolonged indecision.  The EU could choose to punish Britain for leaving by withholding trade. 
• •  This creates unknowns. 

How does this affect my portfolio? We feel if you want to know the long-term impact of an event, it comes back to how the event will affect long-term earnings. (Owning stock in a company means you own the future earnings of those companies.) While we certainly own companies with exposure to Britain and Europe, the earnings impact to a vast majority of our holdings is very low.

There are certainly unknowns about how this could affect the EU. It is possible the EU could break up, but if it is beneficial for the countries involved, then it seems reasonable they would stay together. While this would add to the uncertainty, if countries leave the union but pay their bills, this is far different than when it seemed possible that Greece would leave the EU and default on their debt.

What else should we consider?

• •  Great Britain is the 5th largest economy in the world.
• •  The likelihood of the EU withholding trade from Britain is very low since Britain buys more from the EU than they sell to the EU.
• •  Britain does not use the Euro as a currency; the British Pound is considered a "reserve" currency and is widely traded.
• •  Switzerland and Norway are not a part of the EU and get along just fine.
• •  There will be positives for some and negatives for others.
• •  The news media will sensationalize any possible event to sell advertising.
• •  Many economists are concerned, but they don't call it the dismal science for nothing.
• •  Since 2009 the European Central Bank's power has expanded such that it is more capable of providing support during market disruptions.
• •  As an EU member, Britain was seen as an impediment to further EU integration, so this may allow for a stronger more integrated EU.
• •  Some see this as a vote for freedom from bureaucracy.
• •  Uncertainty is a challenge but also consider North Korea. They have lots of certainty about their economy, yet it's one of the worst in the world. Flexibility, choice, and freedom are valuable.
• •  The EU does not have a free trade treaty with the US, so if Britain leaves, then they can negotiate an agreement.

In Summary: We do not want to understate how this is a very complex situation, with a myriad of potential ramifications. We also know only time will tell us if this was a good or bad move. If Britain follows through and leaves the EU, we still see this as a storm in the vast ocean of your investment journey. How large a storm is yet to be determined, but our first read is that the impacts to the health of global economies and your portfolio should be limited. If this view is proven naive, we will make adjustments as events unfold.

Advisory services offered through Cravens & Company Advisors, LLC a Registered Investment Advisor. Securities and additional advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a Registered Investment Advisor. Securities are not obligations of nor guaranteed by Progressive Savings Banks, NOT FDIC INSURED, NO BANK GUARANTEE, MAY LOSE VALUE, NOT A DEPOSIT, and are NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. Listed entities are not affiliated with FSC Securities Corporation.