8 ways Brexit could directly affect you and your money
It was the vote heard 'round the world. Early Friday morning we learned that Britain's citizens had decided by a vote of 51.9% to 48.1% to leave the European Union in what is being coined the "Brexit," short for "British exit."
The U.K. Referendum had been expected to end in a close vote, but nonetheless a vote to remain in the European Union. However, concerns over sovereignty, immigration, and the country's ability to make its own economic and social decisions ultimately drove the "leave" campaign to success. Unfortunately, investors weren't thrilled with the surprising vote, sending global markets tumbling to end the week, and taking certain currencies, such as the pound and euro, for their wildest ride in decades.
Eight ways Brexit could affect you and your money
Across the pond in the U.S., investors and consumers watched the ripple effects from this decision in dismay, mainly because most Americans don't understand how Brexit could directly impact them. However, Britain's move to leave could have negative consequences for the U.S. and its consumers -- though it's not all bad.
Let's take a closer look at eight unique ways Brexit could affect you and your money.
1. Cheaper travel to Europe
The most immediately felt impact was the devaluation of the British pound relative to the U.S. dollar and other currencies worldwide.
Generally speaking, a country's currency tends to rise in step with its economy. A growing economy leads to a stronger currency, and a weakening economy weighs on a country's currency. With Britain voting to leave the EU, there will likely be a period of one to two years where new trade deals will need to be set up. Between now and then, Britain's economy could go through a temporary economic hiccup, or perhaps even a recession. In response to this expectation, the British pound plunged nearly 10% from its 2016 highs set just hours before the referendum vote.
What this means for Americans is that traveling to the U.K. just got 10% cheaper, so rejoice if you have travel plans to the region. The euro also fell against the dollar, but to a lesser extent than the British pound.
2. Lower oil prices
Another place you'll likely be doing a jig of joy is at the fuel pump, where lower gas prices could await.
Crude oil prices have been crushed over the past two years on oversupply concerns and Saudi Arabia's refusal to lower its production to match slowing global demand. Numerous U.S. drillers have been forced to seek bankruptcy with oil prices dipping below $27 a barrel earlier this year. Prices have since rebounded to about $50 a barrel.
However, crude oil prices tend to feed on growth and certainty. Britain's exit from the EU creates a situation of intense uncertainty in terms of not knowing exactly what this exit might entail, or how long it'll take to accomplish. The economic disruption in the U.K. and EU could put further pressure on global crude oil demand, pushing prices safely back below $50 per barrel and helping consumers at the pump.
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3. Historically low mortgage rates
Global growth uncertainty could also put the kibosh on the Federal Reserve's plans to raise the federal funds target rate, which directly impacts interest rates.
The Federal Reserve's main job is to keep the U.S. economy on track and ensure it doesn't overheat or collapse on itself. Although it raised lending rates for the first time in nearly a decade in December 2015, further rate hikes seem unlikely with near-term growth throughout the EU now uncertain. Since the Fed can influence long-term lending rates through monetary policy, and long-term lending rates are what help determine mortgage rates, we can safely assume that mortgage rates should remain near record lows. That's great news if you're looking to buy a home or refinance.
4. Stable credit card rates
In similar fashion, the federal funds target rate also helps determine the prime rate, or the lowest rate at which money can be borrowed commercially. The prime rate, along with your credit score, is what credit card companies use to determine what you'll pay in variable APR on loaned money that you carry over from one month to the next.
Assuming the Fed halts its rate hikes due to economic uncertainty, it's unlikely that we'd see variable interest rates on credit cards rise anytime soon. That's good news for consumers who are carrying credit card debt.
5. Housing prices could fall
But Brexit isn't all good news. Uncertainty across the pond could adversely impact the U.S. economy (which we'll address in a point below), which in turn could have a negative impact on U.S. home prices. Housing is a cyclical industry that relies on a growing U.S. economy to thrive. If growth continues to slow, or worse yet we dip into a recession, the multi-year rebound in the U.S. housing industry could be put on hiatus. This means if you're looking to sell your home, some of your pricing power may disappear as a result of Brexit.
6. Weak fixed-income security market
Seniors who are reliant on fixed-income securities during retirement are probably going to be cursing Brexit since it'll mean at least the near-term continuation of historically low interest rates.
Just as the Federal Reserve has helped American consumers and businesses by keeping the federal funds target rate near 0% for more than seven years (which has driven down lending rates), it's also hurt our nation's seniors who had previously turned to the safety of U.S. Treasury bonds, bank CDs, and money market accounts during retirement. It's become difficult to find any CD or money market account yielding more than 1%, which isn't even enough to outpace inflation.
Similarly, U.S. Treasury bond yields have sunk as scared investors have flocked to bonds. Remember, bond prices and yields move in opposite directions. A senior hoping for a nice return with a 10-year T-bond would be forced to settle for less than a 1.6% yield. Brexit will likely keep yields on fixed-income securities low for the foreseeable future.
7. U.S. multinationals could take a hit
U.S. multinational businesses, from megacorporations to small businesses, also appear primed to take a hit from Brexit. Whereas the consumer could benefit from traveling to Britain, the cost of exporting U.S. goods to the U.K. or Europe just got between 2% and 10% more expensive overnight.
Multinational companies that trade on the major U.S. stock exchanges report their results in U.S. dollars, but they generate sales in Europe or the U.K. via the euro or British pound. This requires these businesses to convert their euros, pounds, or other foreign currencies back into dollars before reporting their quarterly and annual results. However, doing so when the U.S. dollar is rising and foreign currencies are falling creates a situation where U.S. multinational businesses lose sales and profits during these translations. Seasoned investors can often overlook these one-time negatives that are beyond the control of the businesses themselves, but not all investors will prove so forgiving if the dollar continues to strengthen against the pound and euro.
8. Stocks could struggle
Last, but not least, Brexit could have a direct impact on your investment and retirement account, as you likely saw on Friday. To be clear, no one knows with any certainty what's going to happen with the EU's economy, or Britain's for that matter. However, there's always the potential this split could lead to a domino effect that causes a global recession, and that would be very bad news, at least temporarily, for your investments.
It's important to keep in mind that bull markets and economic expansions occur for far longer periods of time than recessions and bear markets, so altering your investing strategy in a meaningful way may not be the smartest move. Nonetheless, fortifying your portfolio with high-quality dividend stocks and defensive plays, such as utilities, may not be a bad idea in light of Brexit.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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