3 Reasons Why Americans Should Care About ‘Brexit’

Investing
Brexit

What Britain does, or doesn’t 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 Thursday’s historic vote to leave the European Union.

The move to exit the 28-nation EU bloc will have an impact on Americans’ investment portfolios, retirement savings and more. Here’s how.

1. U.S. stock market

If there is anything that investors hate, it’s uncertainty, and the prospect of a British exit, or “Brexit,” 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’s 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 Britain leaves the EU, according to the investment bank KBW. The economic hit here will come as businesses hold off on making investments until the full impact of Brexit is known. Business investment creates jobs and generates future profits, so U.K. voters may have just taken away some confidence in the U.S. economy.

However, some economists think that the impact could be muted. “The British wanted to remain distant so they don’t become entangled in a larger situation. So this is more psychological than tangible on a day-to-day economic level,” Jay Morelock, an economist with FTN Financial, said in an interview with NerdWallet. 

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’s decision to hold rates steady.

Although the vote to exit the EU could bring more economic volatility, there is a possible upside. The continued uncertainty over impact could cause interest rates in the U.S. to remain low — meaning that it will continue to be cheaper for Americans to get a mortgage or student loans. 

3. U.S.-U.K. imports

The U.K. is still an important U.S. trading partner, but with 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 “back of the queue” 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 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 if the British pound grows weaker. And U.S. travelers would likely see the price to visit London become cheaper.

The world and your money

Geopolitical events such as the British 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, recently stated that while the exact economic impact for the U.S. was unclear, a effect of a British exit from the EU likely won’t be positive.

Of various forecasts, Furman said, “the thing that they all have in common is a minus sign in front of them…  you can see minus 1, minus 2, minus 8% on growth.”

If U.S. businesses halt investment in new projects and workers, then investors here could feel some pain. If you’re planning to contribute extra money to an investment account or your 401(k), you may want to pay attention to these developments as you pursue your long-term goals.

Jonathan Todd is a data analyst at NerdWallet, a personal finance website. Email: jonathan.todd@nerdwallet.com.