What About America?

So far, our post-Brexit commentary has centered on the UK and Europe-the epicenter of Thursday's vote, and the region with the highest stakes in the eventual outcome. But what about America, the other half of the "Special Relationship?"

The long-term implications for the US are as unknowable today as they are for the UK and Europe. Trade, the primary economic issue, will take time to sort out-both with the UK and the rest of the EU. US-based multinationals with European headquarters in Britain can't know yet whether they'll need to up sticks. These are crucial issues, but they are long-term issues. Markets move on probabilities, not possibilities. With so much unknown, it is impossible to discern probabilities today. In time, they will become apparent, but that time isn't yet here. For now, stay patient, and know nothing changes for US firms doing business in Britain or the EU today. Tellingly, while US stocks fell Friday, they held up far better than markets in the UK and Europe. There is literally and figuratively an ocean between America and the Brexit saga.

The US and UK share a long history, over a century of strong diplomatic ties, a language and a spirit of self-determination. The Magna Carta is the forefather of America's Constitution. The Glorious Revolution, which empowered Parliament to check the king's power, informed America's own system of checks and balances. The bonds between our countries are undeniable. Yet economically, America and Britain are less intertwined than many perceive. Yes, many businesses operate on both sides of the Atlantic. Many Americans consume British products daily, and vice versa. Yet only 3.7% of US exports last year went to the UK. Only 2.6% of US imports came from Britain.

It is an open question how Brexit will affect our terms of trade with the UK. The US and EU don't have a free-trade agreement (more on this in a moment), though most goods cross the Atlantic tariff-free thanks to WTO and other arrangements. Preserving largely tariff-free trade with the UK is entirely doable, though not guaranteed. If Britain ultimately maintains its status quo of "Most Favored Nation" status at the WTO, then it should largely be business as usual. A huge protectionist backlash on either side, though within the realm of possibility, seems highly unlikely. Notwithstanding the US's overreaction to the global steel supply glut, which saw America jack up tariffs against UK steel exports earlier this year, there just isn't much of an outcry over this trade relationship destroying jobs on either side of the pond. Our economies have evolved similarly and simultaneously. Rightly or wrongly, voters on both sides are outraged at trade with other nations, but not at each other. Americans like their Jags and Rovers. Brits like their iGadgets and the occasional Ford Anglia. Raising tariffs would hurt consumers on both sides, and consumers are voters. Politically, there is no incentive to do this.

Some have floated the prospect of a new UK/US free-trade agreement, which would remove some lingering barriers on some agricultural products and trade in services-especially financial services. Certainly markets, which adore free trade, would welcome this. However, the likelihood is impossible to handicap today. The Obama administration has said Brexit puts Britain in the back of the queue for trade talks, and an agreement might take a decade or more. But the Obama administration is out in six and a half months. This will be up to the successor, whether that is Hillary Clinton, Donald Trump or a player to be named later. Protectionist rhetoric has run hot on the campaign trail thus far, but presidents often moderate once in office. As for the UK, they don't even have a trade rep yet, let alone the staff of researchers and negotiators to get a deal done, with anyone. If a deal happens, it will take time. It's worth considering, but not a reason to get excited today.

As for trade with the rest of Europe, the US and EU have been negotiating a free-trade deal-the Transatlantic Trade and Investment Partnership, or TTIP-since 2013. It aims to streamline administrative barriers like food labeling and regulatory standards (think: auto safety, GMO products and the like), as well as liberalize trade in services, a huge area of opportunity for both sides. Initially, both sides wanted a deal done by year-end 2014. Yet here we are, halfway through 2016, and negotiations have stalled amid heated opposition on both sides. In France, Germany and many other countries-as well as the US-there are strong grassroots and political movements against the Investor State Dispute Settlement Clause, and the debate won't end soon. Multiparty trade deals are always difficult to finalize. The Trans-Pacific Partnership with the US and 12 other nations took years and may never be ratified. TTIP's road was always going to be rough.

Some might point out that the UK, as one of the more market-oriented countries in the EU, would have been a powerful voice in support of TTIP, and negotiations are likelier to fail without them. Indeed, the UK has been a TTIP advocate. But they never had the power to tip the scales. EU trade agreements are negotiated at the institutional level, and the EU trade commissioner is not British-not a knock on anyone, just a fact and observation on Britain's limited influence. Plus, all member-states must ratify any trade deal for it to take effect, and the UK would have been just one vote out of 28. This always depended on local politics in the other 27 nations as well as the US. Nothing has really changed. Here, too, markets would welcome an eventual TTIP, but if it fails, it isn't a negative-merely the absence of a new positive. Stocks have done fine with no TTIP and can keep doing so.

Again, these are the primary issues, and they will take time to discover. What matters most for investors today is this: Nothing changes immediately. Yes, Fed head Janet Yellen told Congress Brexit "could have significant economic repercussions" on Thursday, but it is her job to say such things, lest her overseers decide she is dismissive and unobservant. Yes, global markets reacted violently overnight and first thing Friday, but don't confuse an immediate, sentiment-driven swing for a rational assessment of risk. As Ben Graham famously said: In the short run markets are voting machines, but in the long run, they are weighing machines. Fundamentals carry the most weight, and US economic fundamentals should be fine over the foreseeable future.