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Impact of Brexit uncertain, but U.S. recession called unlikely

Legg Mason, T. Rowe Price respond to Brexit-related market volatility.

The United Kingdom's vote Thursday to leave the European Union could affect Americans' retirement funds, interest rates and international travel plans, but it will be years before anyone fully understands all the repercussions of the unprecedented move.

Stocks plunged Friday in the United States and around the world, the most obvious and immediate impact seen in this country. The stocks of Baltimore's two large investment management firms, Legg Mason and T. Rowe Price Group, saw even larger losses, but both said they are stable and prepared to ride out the market's waves.

Analysts attributed the market swoon to the shock of Thursday's unexpected "leave" vote, and they predicted that the shock will wear off. But the decision sets in motion a complicated two-year process for the United Kingdom, and its separation from the European Union will breed uncertainty about trade, currency and political leadership across Europe for the foreseeable future.

"This isn't a one-day event," said Rick Rubin, a portfolio manager at Tufton Capital Management in Hunt Valley. "This will reverberate for some time."

On Friday, the Dow Jones Industrial Average plummeted 610 points, about 3.4 percent, while the technology-heavy Nasdaq index fell even further, by 4 percent.

The value of the dollar soared against the British pound, to levels not seen since 1985, and rose against several other major currencies. And while that makes a summer vacation in London much less expensive, it also hurts exports by driving up the cost of U.S. goods abroad.

"It's good for tourists, bad for manufacturers," said Roger Kashlak, a professor of international business at Loyola University Maryland.

Kashlak, whose son is studying at the University of Cambridge in England, said the stronger dollar will mean tuition delivering less of a blow to his bank account. On the other hand, the money his son earns working in London won't go as far when he comes home.

The so-called Brexit is unlikely to trigger a recession in the U.S., experts said.

"Obviously, there's a lot of uncertainty, and there's nothing good that comes out of it," said Mark Zandi, chief economist at Moody's Analytics. "But this isn't something that's going to shake the foundation of the U.S. economy."

Still, the turmoil caused by the referendum was not good news for the struggling U.S. economy. It was another in a seemingly unending series of foreign and domestic crises in recent years that have slowed recovery from the Great Recession.

Plunging stocks certainly won't bolster the confidence of U.S. consumers, whose spending accounts for about two-thirds of U.S. economic activity.

Britain is the seventh-largest U.S. trading partner but accounts for only about 3.1 percent of total U.S. trade so far this year. Canada, Mexico and China each account for about 15 percent of U.S. trade.

And though the stock market declines were steep Friday, the Dow would have had to fall nearly 4,000 points, or 22 percent, to equal the Black Monday sell-off of 1987.

The Federal Reserve said it was "carefully monitoring developments in global financial markets" and was prepared to provide dollars to other foreign central banks to increase liquidity. The Fed said pressures in global markets "could have adverse implications for the U.S. economy."

Asked at a Senate hearing about the risk of U.S. recession if Britain votes to leave the European Union, Federal Reserve Chairwoman Janet L. Yellen said: "I don't think that's the most likely case, but we just don't really know what will happen and we'll have to watch very carefully."

The already cautious Federal Reserve policymakers now are unlikely to raise a key interest rate next month — or maybe even for the rest of the year — denying savers a better return on their bank accounts and withholding monetary policy validation of a strengthening economy.

But bad news for savers could be good news for home buyers and businesses looking to expand if historically low interest rates continue.

Adding more pressure to keep interest rates low, money fleeing equities around the world Friday flowed into U.S. government bonds, a phenomenon known as a flight to quality. Such buying pushes bond prices up but reduces their yields.

Financial stocks were among those hammered the hardest in the wake of the Brexit vote.

As Legg Mason's stock price fell 9.6 percent Friday, the company moved quickly to dispel any fears among clients about the vote's long-term significance on the company's financial performance. Legg Mason spokeswoman Mary Athridge said the U.K. accounts for about 13 percent of the company's revenues and a small portion of its assets under management.

"The key is that the markets have not broken down. They are functioning normally, albeit with more volatility, and we're positioned to manage it," Athridge said.

The company has operations in London, long a key European financial center, and expects to maintain a significant presence there, she said.

Legg Mason had contingency plans for various outcomes of the vote, such as the London stock market going dark, and took a conservative approach to investments in the days leading up to the vote.

"We didn't have a bet one way or another," Athridge said.

T. Rowe shares were also down, by 5.3 percent. The fund manager's CEO, William Stromberg, said the company's funds are strong and diverse enough to weather what he and analysts believe is short-term volatility.

"We are confident in our ability to ride through this current period of uncertainty and remain focused on performing well for our clients, both from an investment and servicing standpoint," Stromberg said in a statement. "Our balance sheet remains rock-solid and a significant source of stability for the firm. In addition, the diversity inherent in our business allows us to cope with market volatility and remain focused on our clients."

Though world leaders were on high alert Friday for the fallout from the Brexit vote, analysts preached patience and perspective on this side of the Atlantic.

While investors — especially those whose investment portfolios or retirement funds include stocks of British or European companies — may be tempted to cash out or make changes, analysts advised sitting tight. Long-term investment plans, like retirement funds, are designed to ride the stock market's waves and will recover over time.

"The important thing is not to react in a knee-jerk manner. Don't make any rash decisions," said Steven C. Isberg, an associate professor of finance at the University of Baltimore. "We have no idea what this is going to look like."

Tribune Newspapers contributed to this article.

sarah.gantz@baltsun.com

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