Hold onto your hats.
The Dow Jones industrial average closed down nearly 611 points Friday on a volatile day as investors worried about what the exit of the United Kingdom from the European Union will mean to the economy and business.
It will take weeks and months for the economic outcomes to show in the U.K. and the rest of the world. Back in the U.S., even average folks with a little money in a 401(k) may be looking for answers to questions such as:
WILL STOCKS FALL FURTHER?
The view now is that stocks are reacting sharply because professional investors never thought British voters would allow the country to leave the European Union.
When professionals foresee shocks to the stock market, they change the mix of their investments in advance so they are not hit hard. But in this instance, the pros didn’t see any risk coming, so they didn’t prepare.
Now they are adjusting their investments so they are taking less risk. Given the changes, stock markets are suffering huge movements, but some analysts think that will ease after the pros have made their adjustments.
WILL THERE BE A RECESSION IN THE U.S.?
If there is going to be a recession, it won’t happen immediately. Bank of America Merrill Lynch is predicting a two- to three-quarter recession in the U.K. That doesn’t mean the U.S. will go into a recession.
WHAT’S AT STAKE FOR THE U.S.?
U.S. companies have had trouble selling abroad for months because the U.S. dollar has been strong. Profits, consequently, have been stunted.
The pressure now is likely to become more intense because the U.S. dollar has become even stronger as the British pound and Europe’s euro have weakened on Brexit fears. “Strong” sounds like a good word, and it can be.
A strong dollar can help U.S. companies that buy items from abroad. But it hurts U.S. companies that want to sell their products to other companies
So American companies could lose some business. This has been showing up in profits of large U.S. companies for some time as the U.S. dollar has become the strongest it’s been in 13 years.
HOW CAN AMERICAN CONSUMERS BENEFIT?
The expectation is that with the risks of recession in the air, the Federal Reserve may not raise interest rates at all this year. That means that individuals who might be in the mood to buy a home will be able to count on mortgage rates even lower than the low rates that have existed recently.
The Fed doesn’t directly set mortgages, but rates are affected by the Fed and also how investors are feeling about the risks in the world.
WHAT INVESTMENTS ARE RISKY NOW?
With concerns about the slowing economy in Europe, so-called “cyclical stocks,” which do well when the economy is strong and slip when the economy weakens, could be the most affected. That would include energy, basic materials, industrial and technology stocks.
Stocks suffering some of the sharpest drops have been financial stocks because of all the financial arrangements between countries that could be disrupted by changes in global relationships as the European Union faces stress.
Many analysts have been warning to sit tight for a while because negative news in the world could take the bank stocks down even further. Yet for people who like to go bargain hunting, there was a debate among analysts Friday about whether banks are now cheap enough to buy.
WHAT DO INVESTORS BUY FOR SAFETY?
Investors worldwide have been buying U.S. Treasury bonds and gold as safe havens. But gold has shot up $60 an ounce to $1,320 lately, making some analysts reluctant about expecting a further increase from here. Another attraction in a nervous market has been utility stocks and others that pay sizable dividends.
Meanwhile, workers who are in the practice of stashing a little money into 401(k) mutual funds each week can just keep feeding those retirement funds. With retirement years away, you are likely to look back 10 or 20 years from today and not even have a memory of the market dive after Brexit.
Contact Gail MarksJarvis at gmarksjarvis@tribune.com.
