How Do United States Financial Markets React to Global Political Crises-The Brexit Vote
A blog by Frederic Slade, CFA, Assistant Vice President and Senior Director, Investments, Pentegra Retirement Services – August 16,2016
In my April 2014 blog, I analyzed the impact of several foreign political crises on the United States stock market over 1 week, 1 month and 3 month periods after the event. The results suggested the following:
- The greater the economic impact of the country/region on the US, the more negative the impact of the event on the United States stock market in the short run (1 week, 1 month).
- In general, regardless of the country, the impact of the crisis dissipated after the first month.
The United Kingdom voted on June 23, 2016 in a referendum to exit the European Union (Brexit). How did the United States markets react? The first day after Brexit, fear permeated the markets, which had predicted that the United Kingdom would remain in the European Union. The S&P 500 Index return plunged (-3.6%) and the British pound plunged. However, after one week, the market decline had decreased to (-0.7%). One month after Brexit, the S&P 500 Index return was positive, +3.1%. While the aftereffects of Brexit (slowing United Kingdom economic growth, trade issues, political events) could potentially roil the markets over the next few years, the initial impact of Brexit has been fairly muted thus far and certainly less dire than initially anticipated.
What might explain the relatively muted effect of Brexit on U.S. financial markets?
- The United States does approximately 3% of its foreign trade with the United Kingdom and 17% with the European Union1. While the United Kingdom trade relationship is important, the United States markets may be more concerned for now with economic and political developments in larger trading partners such as Mexico, China and Germany.
- With Brexit, the financial markets have been more likely to view the United Kingdom on a stand-alone basis, with less likelihood of creating the “contagion” that occurred when Greece and southern European countries were in the midst of political and economic crises.
- The British central bank, the Bank of England, has helped calm markets by standing ready to inject funds into the banking system.
Thus far, the impact of Brexit on United States markets has been consistent with how the markets have reacted to previous foreign political crises.
1Source: United States Census Bureau
NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.
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