Economy

How Stocks May React to Britain's EU Brexit Vote

Rafi Farber

Published: March 10, 2016 9:55 am

Last Updated: January 13, 2020 12:07 pm

In June, the citizens of the United Kingdom will vote on whether to stay in the European Union. The decision seems a momentous one, and indeed it is, for two main reasons. First, regardless of the EU’s faults, of which there are many, the EU does ensure one important thing. That is, the minimization of trade barriers between its member states.

There is no inherent connection between the EU’s existence and free trade in Europe. All European countries could theoretically retain free trade between them without any formal union. However, Britain leaving the EU could result in continent-wide bitterness that may result in tariffs being raised against the United Kingdom in a revenge move. The United Kingdom pays £50 million in fees every day to stay in the EU, and that money no longer going into the pile may inspire other European politicians to isolate the UK economically. The attempt would be to discourage any other nation from leaving the union and to paint the UK as an economic failure in the event that it does in fact leave.

It is unlikely that the rest of the EU will simply allow one of their members to leave without any consequences, so in the event that the United Kingdom does vote to leave, exiting British stocks would be a good idea, assuming punitive measures are taken against Great Britain.

As for U.S. equities, there may be a knee-jerk negative reaction to such a vote, but there shouldn’t be any long-term consequences across the Atlantic. The U.S. economy is firmly in the boom phase, with credit expanding rapidly and now even price inflation starting to show up. Pressure on stocks from the liquidation of sovereign wealth funds originating from oil exporting countries seems to have abated for now. Given that, there is no major force stopping stocks from trending higher from here. The fact that few seem to trust the extension of the current bull market into its eighth year only brings into focus the Wall of Worry that generally keeps bull markets fueled. Any move down in U.S. stocks on a Brexit should be seen as a buying opportunity, provided credit is still expanding at a moderate pace come June.

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