Americans have plenty of political action taking place at home these days, with President Donald Trump and Congress pushing for health care reform, tax reform, housing finance reform, corporate deregulation and other initiatives.
But while Trump is stealing the headlines in America, there is a great deal of important political news taking place in Europe that could have a major impact on global financial markets.
The U.K. is holding its most critical vote since the Brexit referendum last year, determining in a snap election which political party will oversee the critical transition of the U.K. out of the eurozone.
The Brexit vote took many investors by surprise last year, but the U.S. stock market barely seemed to notice. The Dow Jones industrial average initially plummeted 3.4 percent, giving up more than 600 points in a matter of hours. However, within a week the Dow had recovered all its losses, and it is now up more than 17 percent from pre-vote levels.
Economists and analysts expecting a major U.S. fallout from the Brexit vote have been wrong up to this point. American investors brushed off fears that Brexit would produce a domino effect of other exits that would ultimately result in the dissolution of the EU.
When liberal and pro-EU candidate Emmanuel Macron won the French election in May, preserving the integrity of the EU, American investors reacted by sending the Standard and Poor’s 500 index up just 0.09 points the following day.
In fact, Americans haven’t seemed to care much at all about what has been going on in Europe throughout the past few years. When European economic growth dipped into negative territory from the start of 2012 to late 2013, the S&P 500 rose more than 25 percent during that time.
On the surface, the idea that Europe doesn’t matter to U.S. investors makes sense. After all, the S&P 500 consists entirely of stocks listed on the American New York Stock Exchange and Nasdaq Stock Market. Only 19 of the S&P 500 components are headquartered outside of the U.S. But even Americans who invest exclusively in American stocks have a vested interest in what happens in Europe.
“There is a great deal of political uncertainty in Europe, which contributes to economic uncertainty,” says Owen Murray, director of investments for Horizon Advisors. “There are many U.S. companies that do business in Europe, so even if a U.S. investor does not invest in international stocks, the earnings of many U.S.-based companies are highly dependent upon the health of the European economy.”
For example, more than 18 percent of Ford Motor Co. (F) revenue comes from the U.K. alone.
In fact, American companies like Ford have a lot riding on the approach the U.K. takes in negotiating its departure from the EU.
“For the very first time since 2008, we have European earnings growth starting to pick up,” says TD Ameritrade chief strategist JJ Kinahan. “If we have the potential for growth in Europe along with the growth in the U.S. and potential for Asia growth, it puts us at the starting gate of great economic potential. This is a very shaky area, however, and any upset due to a surprise British vote or any banking or growth problems in Europe could set the economy back quickly by impacting U.S. revenue and earnings targets.”
The more investors are able to forget about politics and focus on improving economics in Europe, the more likely it is that U.S. companies will be able to unlock their full earnings potential. The first step in preserving the status quo in the European economy is for European voters to join France in shrugging off the Brexit vote and choosing to preserve the remainder of the eurozone.
“Our base case for Europe is one in which voters in France, Italy and other counties with strong anti-European sentiment reject the more extreme voices within their political system and allow the European status quo to continue,” says Burt White, chief investment officer for LPL Financial
Trump secured a U.S. election victory on a platform that championed protectionism and nationalism. However, U.S. investors would be…
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