onto your hats.
Dow Jones Industrial Average closed down 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.
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:
STOCKS FALL FURTHER?
view now is that stocks are reacting sharply because
professional investors never thought British voters
would allow the country to leave the European Union.
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.
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.
the immediate shocks will ease, some analysts expect
volatility — or a lot of ups and downs — for the
rest of this year, maybe longer. The key: watching for
other European countries deciding to vote to leave the
European Union too. If others look like they will leave,
investors will imagine political turmoil and in the long
run a shake-up in trade and possible recession in
Europe. The expectation is that investors will be
unnerved, so there could be bouts of stock selling.
THERE BE A RECESSION IN THE U.S.?
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.
an interview on CNBC on Friday, former Federal Reserve
Chairman Alan Greenspan was asked if he expected a
recession. He said he is simply expecting a long period
of stagnation — one of the most troubling periods, he
said, he’s ever seen.
envisions companies unsure about the future, and
therefore reluctant to invest in their future. The
result: sluggish growth. He added, however, that apart
from the Brexit vote or European turmoil, the global
economy — including the U.S. — already has been
weak. He noted the stagnant pay among U.S. workers. The
latest events just add strain to a sluggish global
economy, according to Greenspan.
AT STAKE FOR THE U.S.?
companies have had trouble selling abroad for months
because the U.S. dollar has been strong. Profits,
consequently, have been stunted.
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
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. Now that the
pound and euro have become weak, people and businesses
in Europe will have to spend more to buy from the U.S.
because European money won’t buy as much as it used
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.
CAN CAUSE A RECESSION?
there is a great amount of uncertainty about the future.
When company managers aren’t sure what to expect, they
hold on to cash rather than spending it. They may not
buy new equipment, build a new factory or distribution
center or hire people. They may start layoffs if it
looks as if sales might decline.
as one company loses business, or can’t grow, that
company cuts back, and that leads another business to
cut back. If individuals lose jobs or fear they will
lose their jobs, they cut back.
CAN AMERICAN CONSUMERS BENEFIT?
dollars worth more than they’ve been for a long time,
Americans can visit Europe or the U.K., and their money
will go further, buying everything from cab rides to
restaurant food and hotel rooms.
from Europe will be easier for Americans to afford. The
opposite is at stake for U.S. businesses counting on
foreign tourists. Hotels in the U.S. could have trouble
attracting European travelers because their money will
buy less in the U.S. than it used to buy.
might skip trips to the U.S. Companies such as Tiffany,
Coach and Macy’s, which typically have attracted a lot
of foreign spending, could see profits shrink.
OTHER BENEFITS COULD AMERICANS ENJOY?
expectation is that with the risks of recession in the
air, the Federal Reserve may not raise interest rates at
all this year.
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.
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. A key for mortgages is the
yield on 10-year Treasury bonds. After the Brexit vote,
those yields fell to an ultra-low 1.56 percent — much
lower than the recent 1.7 percent.
fall when the bonds are popular, and bonds are very
popular now to people worried about the rest of the
world. So the housing market could get an additional
lift from home buying. But there could be another twist
to the trend. To buy homes, people must feel confident
about the future. If U.S. companies get jittery amid
worries about Europe and lay people off, Americans might
hesitate about buying homes or other major purchases.
INVESTMENTS ARE RISKY NOW?
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.
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.
issues for banks go beyond direct effects from Brexit
and financial arrangements between companies. With many
countries in the world worried about recession, the
Federal Reserve and its counterparts in Europe are
likely to keep interest rates at ultra low levels, and
low interest rates are harsh on bank profits.
bank stocks have plunged, 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.
DO INVESTORS BUY FOR SAFETY?
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.
attraction in a nervous market has been utility stocks
and others that pay sizable dividends. But stocks are
not as safe as bonds. Analysts have been telling
investors to wait a while longer before buying stocks
because they are expecting more opportunity to come.
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 the Brexit vote. The stock market climbed almost
200 percent after the 58 percent plunge in the 2008-09
recession and financial crisis.