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Average investors shouldn’t panic over Brexit storm

Michael Wayland and Michael Martinez
The Detroit News

Britain’s unprecedented decision to leave the European Union sent global financial markets into tailspins Friday, but analysts say that average investors shouldn’t panic over their personal investments or retirement plans.

Despite uncertainty caused by the Brexit, which flipped Wall Street upside-down and sent individual portfolios and 401(k) plans downward, financial experts see minimal long-term damage to Americans’ portfolios as long as their money isn’t caught up in companies that heavily operate out of England.

“Geopolitical events happen,” said Joe Smalley, president of Lansing-based Smalley Investments. “The knee-jerk reaction is to panic or sell or to get out of the market. At the end of the day though, if the investor has a long-term time horizon … they can be rewarded for just staying put.”

Smalley advised his clients Friday to analyze their situations into short-, medium- and long-term needs and make “sure your investments match those needs.” If consumers need short-term money, use a cash or checking account. The volatile stock market is better for long-term investments that can be left alone during periods of uncertainty.

U.S. stocks gave up all their gains from earlier in the year. The Dow Jones Industrial Average tumbled 611 points, or 3.4 percent. The S&P 500 dropped 76 points, or 3.6 percent. The Nasdaq suffered its biggest loss since mid-2011, down 202 points, or 4.1 percent. Indexes in Europe and Asia took even larger losses.

David Kudla, CEO and chief investment strategist at Mainstay Capital Management LLC in Grand Blanc, agrees that despite the downturns, there’s no need for rash decisions.

“This was a surprise to the markets and many on Wall Street, so we saw an immediate impact,” he said. “I’m not as concerned with the U.S. markets as the European ones. This is a wall that just went up. ... It’s a setback for U.K. companies and companies that have operations there and are integrated within the European Union.”

Bill Adams, senior international economist with PNC Financial Services Group, said even if there is a recession in the U.K., “it’s not going to dramatically change the outlook for the U.S. economy.”

PNC chief investment strategist Bill Stone, in an investment note Friday, advised “that a knee-jerk reaction to this vote is not likely to be a wise investment decision,” and said a sell-off of stocks or other investments is unwarranted.

Many actually see opportunity for those willing to invest in a down market. There are other potential benefits for Americans as a result of Britain’s vote to leave the EU, including lower mortgage rates and cheaper costs when traveling in Europe.

The pound and euro both dropped Friday, which should make British and eurozone exports cheaper overseas. American travelers heading to Britain and the rest of Europe are going to find cheaper meals, hotels, souvenirs and museum admissions because the U.S. dollar will go farther against a weaker pound and euro. Airfare for peak summer months probably won’t dip, but any taxes and fees levied in Europe will be cheaper.

Mortgage rates, which are already at historically low levels, could decline, as investors put their money into safe investments, including U.S. Treasuries. High demand for government debt and other bonds pulls down interest rates.

“Two polar opposite things happened: Equities across the globe all tanked today ... but bonds, especially those backed by strong governments like the United States, did well,” said Bob Walters, chief economist and vice president of the Capital Markets Group for Quicken Loans Inc. “Mortgage rates are back down to some of the all-time lows that were last enjoyed in 2012.”

Walters said the industry is down about a quarter of a percent lower than a week ago to between 3.3 percent and 3.65 percent. He said he expects the rates to stay low, giving mortgage-seekers a better deal to finance their homes.

Michigan State University economics professor Charles Ballard, however, cautions that while the market may recover once the initial shock of the Brexit wears off, there are some long-term risks for the U.S. market if others decide to leave the union.

“We really don’t know how that is going to go,” he said in an email. “My hope (and I think there is a decent chance that this will happen) is for “EU Lite,” under which the U.K. maintains more-or-less free trade with the rest of Europe.

“If that happens, it will minimize the damage. However, it will be many months, and probably a couple of years, until everything is agreed to.”

Ballard said he “would not be surprised for this to have some long-term effects on the markets,” which in turn could “mean that people will see a smaller balance in their 401(k)s and other portfolios” but emphasized “that people should not panic.”

“If you panic and sell when the market is at the bottom, that is a formula for big-time losses,” he said.

David Sowerby, portfolio manager for Loomis, Sayles & Co. in Bloomfield Hills, said he expects the stock market decline may continue.

“In the very near term, uncertainty will prevail and the stock market has no appetite for uncertainty,” he said. “What usually happens is you get normally a slightly additional pain before it becomes a better buying opportunity.”

Financial stocks, banks and auto stocks took hits Friday. Some investors fled to gold and U.S. Treasuries. Michigan energy stocks fared well: DTE Energy stock closed up 1.6 percent; CMS Energy increased 1.8 percent.

Sowerby said, “While this movie is different than some of the movies I’ve seen before, it’s still one of those events that tests the discipline and patience of investors.”

The Associated Press and Detroit News staff writer Melissa Burden contributed.