They actually did it. The Brits voted yesterday to leave the European Union (EU). In reaction, stock markets around the world have dropped this morning, bond yields are falling, the US $ is rising and the price of oil is down. In mid-day trading the US stock markets are down about 2.5% while developed foreign markets are off about 8%. Meanwhile US Treasury bond prices have risen to reduce the yield on the US 10 year note to 1.5%, and gold has risen 5% to $1,320 an ounce.

What does all of this mean to your portfolio? In the near term there likely will be continued stock market volatility as the implications of this emerge. The US Federal Reserve will take no action between now and our fall Presidential election. Market observers are already commenting that the US markets will be viewed as the only safe haven, giving buying support to our markets.

Speculation has already turned to the question “who is next”. This will precipitate questions about the long term viability of the Euro as a currency. As discussed in an excerpt from our upcoming commentary, we have long rejected the conventional thinking that 30% of one’s equity portfolio should be invested in non-US securities. The Morgan Stanley All-World index, a popular benchmark index for advisors like Nelson Roberts, has a non-U.S. exposure of 46.5%. Today we have a position of 2% for the foreign developed market ETF and 3% for emerging. The impact on our portfolios from today’s action will be significantly muted by this relatively low exposure.

How will all of this play out? David Cameron, the UK Prime Minister, has gone off to Buckingham Palace to tender his resignation. This means nothing substantive will happen until his replacement takes office in October. The US-UK relationship will remain unchanged. It will take years for the UK to negotiate new trade agreements with all of the remaining EU members. In the meantime it will probably be trading as usual, however longer term, further disassociation will raise barriers to EU member growth in aggregate.

This vote can be seen as a majority statement by UK voters that “Whatever was working was not working for me so I want something else.” Several of you have already commented to us that this sentiment is prevalent here in the US on both sides of the aisle; witness the support that both Donald Trump and Bernie Sanders have garnered. Pre vote polling seems to not have accounted for this very well, leading to the question “could something like this happen here?”

Stepping back further, we see this sentiment as a global phenomenon which at its core is fundamentally a swinging of the pendulum between globalization and nationalization. The apogee of nationalization precipitated the last world war. Since then trade barriers have been steadily reduced. The Brexit will, we think, mark this as a turning point and future developments will further raise economic barriers between countries.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.