Immediate reaction: The UK voted by 17.4 million to 16.1 million to leave the EU. By noon Eastern Time, the S&P 500 was down approximately 2.7% with the loss occurring at the opening bell. The global markets are generally down more severely. The Global Dow is down approximately 5.0%. Sweden, Finland, and Estonia are up. We mentioned that financial turmoil would occur if the UK voted to leave. It is happening. We are carefully monitoring movements in the foreign exchange and bond markets. However, we will need more data beyond what is available in these financial indicators to confirm the actual impact of this vote on our long-term outlook.
Next step: The UK needs to determine when to trigger Article 50 and begin the formal process of withdrawing from the EU. The process is supposed to take a couple of years from start to finish. Having never seen this process before, one can only speculate about the legal and economic drama this process will create.
What we will do: ITR Economics will jump on the financial, consumption, production, sentiment, and leading indicator data as it comes out to determine if the initial negative financial reaction spreads beyond the probable initial wave of uncertainty. This will help us determine if there is any enduring change to the business cycle trends for the US, UK, and Euro Zone.
What we won’t do: We will not react to speculation about what the vote means. We will change our outlooks based on what the data tells us. This means we will be less likely to issue snap judgments in the coming weeks, but we will be more prone to calmly sharing our findings with you as we put the economic puzzle pieces together.
In the longer run: People need to consume and companies want to produce. As the dust settles in the coming weeks and months, we will be relaying any adjustments to our long-term expectations in the ITRTrends Report™.