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What Happened to Your Money?: Lessons from Brexit

What Happened to Your Money Lessons from Brexit

Last Friday brought news with truly global implications: British citizens voting to leave the European Union. The results of “Brexit,” or a referendum on whether the United Kingdom should stay a member of the EU, were surprising for many. By a margin of almost 52% to 48%, UK voters signaled their desire for departure.

In response, British Pound Sterling fell over 10% against the U.S. dollar overnight. Since then, the stock market has been in a flurry. To highlight recent market activity, as noted in stories from CNBC, Reuters, and MarketWatch:

  • Brexit and future eco-political possibilities provoked investor panic
  • The CBOE Volatility Index, an index measuring fear in financial markets, rose 49% to 25.76, its highest level since February 2011
  • There was massive investor selloffs, as a result
  • U.S. stocks plunged more than 3% on Friday, leaving the market in the red so far for 2016
  • On Friday, the S&P 500 fell 3.2% -- it lost all its gains in 2016 and its worst decline since August 2015
  • The Dow Jones Industrial Average lost 610 points on Friday, its 8th largest point loss ever
  • With a 4.5% decline on Friday, the NADSAQ was down nearly 6% year-to-date on Friday
  • Financial-sector stocks dropped 5.4%, the worst losses since August 2011 (a trend accentuated by London being a global financial center)

In this week, market volatility has continued. Having opened at 2,103.81 and closed at 2,037.30 on Friday, the S&P 500 has been fluctuating, at one point reaching a low of 1,991.68 on Monday, June 27. Given historical data, Savita Subramanian, an equity strategist at Merrill Lynch, had projected the S&P 500 could fall 6-7% due to selloffs. Subramanian had been bullish on stocks prior to Brexit vote results being announced.

The Importance of Keeping Money Safe

Against this backdrop, David Bianco, chief equity strategist at Deutsche Bank, has worries about the future. As he told CNBC reporter Tom DiChristopher: “I’m very concerned about the market for this summer… I think the S&P likely falls to something like 1,950, perhaps lower.” Bianco indicates he believes there may be “significant downside risk” for the U.S. stock market.

As Brexit shows, political events can have notable economic consequences. These market ups-and-downs can pose risks for retirees – particularly income risk for seniors who rely upon equity returns for income. Anytime the market falls, it diminishes earnings which otherwise could be used for future monthly income needs. If market losses are severe, your nest egg could really take a big hit.

For people worried about retirement income they might lose, or how market volatility can impact their financial security, “safe money” alternatives like annuities can help. Annuities protect assets safe market downfalls and keep them safe with contractual guarantees.

What Could the Future Be?

The future is always uncertain. However, it’s reasonable to say Brexit raises new geopolitical risks that can further impact the market. There are also other possibilities to keep in mind:

  • There may be second-wave effects we haven’t seen yet. Stephen Auth, CIO at Federated Investors, urged caution when he spoke to reporter Rodrigo Campos of CNBC: “The market has really not fully digested the second-order impacts of this yet.”

  • Market performance may be slow – corporate earnings for companies on the S&P 500 and other indices are projected to be sluggish.

  • “Inspired” by the UK’s looming departure, other nations may attempt moves of their own.

In turn, political moves by other nations could shift geopolitical dynamics, which can bring additional “shocks” to the market. “Now we have to worry about geopolitics because these events are going to be repeated. This comes against a backdrop of a very weak global economy,” Lee Ferridge of State Street Global Markets told CNBC reporter Evelyn Cheng.

Why Might Future Geopolitical Risks Linger?

Let’s put this in context. Prior to the UK’s impending departure, the European Union included 28 member states. The EU is bound in an internal market unified by common economic interests and a standardized set of laws. Every member state is bound to these laws. Politically, the EU has multinational and intergovernmental decision-making functions.

Of these 28 member states, 19 members comprise the Eurozone. The Eurozone is a monetary union in which these 19 nations use the Euro as their common currency and legal tender. The other nine members, which had included the UK, still use their own currencies.

With all of this said:

  • Eurozone interests hold some influence in overall EU political decisions, even when not all EU members are in the Eurozone
  • To enjoy the benefits of EU membership, member states are obliged to set policies that help promote EU interests
  • Thus, member states could have competing interests: Should they commit to policies more beneficial to national interests or are also conducive to EU interests? 

Keep in mind this is oversimplifying complex geopolitical matters, but it can help give insights for future eco-political outcomes – and how the market could further impact retirement finances. In terms of policy commitments for EU interests, member states may have to adjust monetary and fiscal policy tools. There are a number of EU member states with sizable parts of their populations open to “EU exits.” According to CNBC staff writer Everett Rosenfeld, France and Italy are two such nations.

What are Solutions?

As we discussed above, events such as Brexit and their market effects show the importance of keeping money safe. Recovery from market losses can take years – a precious timespan within retirement. Many seniors and pre-retirees have found security by putting a percentage of their retirement assets into annuities.

Annuities allow you to keep your money safe from the aftermath of market downturns. Depending on type of annuity you choose, you can even enjoy reasonable growth potential opportunities in a tax-efficient arrangement. If you're ready to see if an annuity strategy makes sense for your retirement financial picture, can help you.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Sources and helpful articles on Brexit and the stock market:

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