When I left the office yesterday evening, what was NOT on my Friday to-do list was to write a note about Britain voting to the leave the European Union (EU). The latest polls, although neck-and-neck, tilted toward “remain” and the betting markets, which historically are more accurate than polls, showed 4:1 odds that remain would carry the day. Even Nigel Farage, a key leader in the Brexit movement, struck a concessionary tone in his late-in-the-day speech. By 9pm, all of that had changed, leaving just about everyone stunned, and global investment and currency markets reflected that shock throughout the night and into this morning. And such is life in the big city. There are going to be tankerfuls of digital ink spilled on this topic today and in the coming weeks and months, and although I’m going to use some of that ink, I’m going to be brief, at least for the moment. So, in no particular order of importance, here are a few points worth remembering about the referendum and what it may mean.

First of all: Wow! A really surprising outcome given the tenor of markets this past week. Just about everything one could read, every prognosticator and, as I said above, the betting markets, got this wrong. Instead of an expected 52-48 for stay; it ended exactly the opposite. This is similar to the surprise around Donald Trump winning the Republican nomination (and there are other similarities to Trump’s nomination; more on that below).

Nationalism & Protectionism on the Rise: Aside from the likely economic impacts this will have on the UK, the leave vote is yet another data point confirming the rise in nationalism and protectionism throughout Europe and even in the US. At heart, the EU is essentially a EU-wide trade agreement, and as we’ve seen here as evidenced by Donald Trump’s popularity, free-trade and globalization are under assault.

Globalization & Immigration: I believe that at the heart of both the UK leave vote and the ascendancy of Donald Trump are two secular issues: 1) the dislocating economic effects of globalization on workers everywhere . . . job losses, high unemployment, and lower wages; and 2) concerns over immigration, which are partly economic, and partly cultural, if not xenophobic. These issues are really big, really complex and aren’t going away anytime soon. There just are no simple answers. I also don’t believe, despite the rhetoric of both the Brexiteers and Donald Trump, that protectionism and/or increasing nationalism is the answer. Said another way, I think a large part of the populace- here and abroad – is being sold a bill of goods that isn’t likely to solve the problems that people are facing. This is not to say, though, that I think I know what the answer should be.

Effect on UK and EU: It is unclear as to just how bad the economic impact will be on the UK and to a lesser extent the EU as a whole. No one, and I mean no one, knows this yet and there are just too many questions hanging out there: How does the exit actually unfold? Does the UK use this as a bargaining chip for a better deal, but remain? How quickly and openly do the EU and the US (and other UK trading partners) renegotiate UK-specific trade deals (vs. putting the UK in the penalty box for leaving)? Will this spur other nations to pursue an EU exit strategy? Lots of questions, but very few answers for the time being. Those questions notwithstanding, it would really surprise me if this decision works out terribly well for the UK. Markets, while prone to overreaction, are not happy with the vote, with the UK pound down 8% versus the dollar as I write this; European stocks down about the same, and US stocks down a bit more than 2%, although much better than the 5% drop US futures markets showed last night when I went to bed. (And, by the way, Japan’s Nikkei 225, which also dropped precipitously overnight, is already showing a bounce in futures markets today, up about 2.5% when I last looked.)

US Effects: Who really knows this point? A recession in the UK – a distinct possibility – will not help the US or European economies as the UK is the 5th largest economy in the world and one of both our and the EU’s largest trading partners. That said, I’d be surprised if the Brexit vote has a major long term impact on the US economy or markets, today’s shock reaction notwithstanding.

Remember this: Market reactions tend to have a “sell first, ask questions later” mentality to them, and that is almost never a profitable strategy. So, when big surprises happen – whether they be a Black Friday (1987), a 9/11 (2001), or a Lehman Brothers collapse (2008) – markets usually overreact, then settle, then recover, historically without any permanent loss of capital for those who are diversified, patient and don’t succumb to knee-jerk reactions. So, while the M.O. of far too many investors is “panic, sell, regret, rinse and repeat”, I would try to avoid that tendency here. While a recession or slowdown in the UK, and possibly Europe, and its knock-on effects around the world are not likely to be net positives for anyone, the world won’t end and the Brexit vote doesn’t fundamentally change the the calculus that stocks over longer periods have historically provided higher returns, net of inflation, than more stable alternatives like bonds. And, given the exceedingly high prices and low yields of bonds these days, there is nothing that makes me think the relative attractiveness of owning equities, warts and all, versus bonds has changed. Finally, it is worth remembering that we constructed your portfolio as we did for a reason, in the cold light of day, knowing full well that that these kinds of events are going to occur (even if we don’t know what they will be specifically) and that markets and economies are very self-healing over time.

As always, more than happy to chat in more detail so please let me know if you would like to do so.