Three reasons American investors should care about Brexit
What Britain does, or doesn鈥檛 do, might not seem relevant to investors and consumers on this side of the Atlantic. But just like a Cadbury Creme Egg, there is more than meets the eye about聽Thursday鈥檚 historic vote to leave the European Union.
The move聽to exit聽the 28-nation EU bloc will have an impact on Americans鈥� investment portfolios,聽retirement savings聽and more. Here鈥檚 how.
1. U.S. stock market
If there is anything that investors hate, it鈥檚 uncertainty, and the prospect of a British exit, or 鈥淏rexit,鈥� from the EU made investors in the U.S. and the U.K. nervous. In a NerdWallet analysis of data at political betting site PredictIt, which calls itself a stock market for politics, we found that the odds of a British exit over the past three months tracked the VIX index, a measure of volatility in the Standard & Poor 500. The VIX measure of market risk tends to swing wide when investors are fearful.
Indeed, stocks in the U.K. and Europe tumbled after the exit vote was announced and U.S. stocks followed with steep declines Friday.
Why is the fate of Britain鈥檚 EU membership intertwined with U.S. markets? One reason is that businesses also hate uncertainty.
American banks forecast a 5% to 9% drop in profits next year for U.S. businesses when聽Britain leaves the EU, according to the investment bank KBW. The economic hit here will聽come as businesses hold聽off on making investments until the full impact of Brexit is聽known. Business investment creates jobs and generates future profits, so U.K. voters may have just taken away some聽confidence in the U.S. economy.
However, some economists think that the impact could be聽muted. 鈥淭he British wanted to remain distant so they don鈥檛 become entangled in a larger situation. So this is more psychological than tangible on a day-to-day economic level,鈥� Jay Morelock, an economist with FTN Financial, said in an interview with NerdWallet.聽
2. U.S. interest rates
The Federal Reserve acts as the gatekeeper of the U.S. economy, and when it considers whether to change interest rates, it also weighs global affairs. Janet Yellen, chair of the Fed, said that the uncertainty around the Brexit vote was a factor in last week鈥檚 decision to hold rates steady.
Although the vote to exit the EU could bring more economic volatility, there is a聽possible聽upside. The continued uncertainty over impact聽could cause聽interest rates in the U.S. to remain聽low 鈥� meaning that it will聽continue to be cheaper for Americans to get a mortgage or student loans.聽
3. U.S.-U.K. imports
The U.K. is still an important U.S. trading partner, but with聽the British voting to leave the EU, there would be no trade pact between the countries.
In April, President Barack Obama said in London that a vote to leave the EU would move the U.K. to the 鈥渂ack of the queue鈥� when it comes to negotiating a new trade deal with the U.S. Without a pact, the cost of trade with the U.K. will go聽up for consumers on both sides of the Atlantic.
One caveat: The cost of imported goods from the U.K. could go down for Americans聽if the British pound grows weaker. And聽U.S. travelers聽would聽likely see the price to visit London become cheaper.
The world and your聽money
Geopolitical events such as聽the British聽vote to leave the EU can have an impact on your own wallet, even if they happen across an ocean and thousands of miles away.
Jason Furman, chairman of the Council of Economic Advisors,聽聽that while the exact economic impact for the U.S. was unclear, a effect of聽a British exit from the EU likely won鈥檛 be聽positive.
Of various forecasts, Furman said,聽鈥渢he thing that they all have in common is a minus sign in front of them鈥� 聽you can see minus 1, minus 2, minus 8% on growth.鈥�
If聽U.S. businesses halt聽investment in new projects and workers, then investors here could feel some pain. If you鈥檙e planning to contribute extra money聽to an investment account or your聽, you may want to pay attention to these developments聽as you聽pursue your long-term goals.
Jonathan Todd is a data analyst at NerdWallet, a personal finance website. Email:聽jonathan.todd@nerdwallet.com.
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