By Don Gould

Voters in the UK took markets by surprise on June 23, passing a referendum calling for Britain to withdraw from the European Union (EU)—the so-called “Brexit.” In the lead-up to the vote, investors showed increasing confidence that the motion would be rejected, bidding up both stocks and the pound sterling. Equity markets and sterling thus plunged when the referendum carried, partly based on fears about the economic impact of Brexit, but also in large measure due to the shock of the outcome—a sort of panic selling response.

Since the June 25 market lows, stock markets have more than recouped the early post-vote decline, in some cases reaching all-time record highs. The pound sterling, however, remains below its pre-Brexit levels, and UK property funds have also come under serious selling pressure. Prime Minister David Cameron, who led the effort to defeat the referendum, resigned in the wake of the vote and has been replaced by cabinet minister Theresa May, who has vowed to proceed with the exit from the EU.

Brexit raises many questions, but offers few answers at this time. Among the questions:

• Will the UK actually exit the EU? The referendum is non-binding, a heavy majority in Parliament favors remaining in the EU, and there seems to be some “voter’s remorse” in the air. New Prime Minister May promises to stay the course on Brexit, but that’s surely the path of least political risk for a brand new PM.

• If Brexit happens, when? Under the Treaty of Lisbon (which functions as the EU’s constitution), a two-year negotiation window opens only when the UK invokes the treaty’s exit clause. There’s no sign of that happening anytime soon, and many observers believe the two years could expand into a much longer timeframe.

• If and when Brexit happens, what will the terms of the divorce look like? The UK will want the trade advantages of EU membership, without the obligation to accept the free movement of EU residents across its borders. Understandably, the EU says you can’t have one without the other.

• What about Scotland and Northern Ireland? Both of these UK members voted strongly pro-EU. Will they seek to secede from the UK in order to remain in the EU? And would that cause UK leadership to reconsider Brexit, despite the vote?

• If Brexit happens, will this mark the beginning of the EU’s unraveling? Anti-EU sentiment has been rising across the continent.

• And if the EU comes apart, what are the geopolitical implications? Will the Eurozone lose its power and status in international affairs? Might this embolden Russia’s Putin further?

While much is unknown, we can make a few initial observations:

• Brexit introduces uncertainty into the UK economic picture, lowering both consumer and business confidence, and consequently reducing UK economic growth expectations.

• Any adverse impact on the UK economy will have ripple effects in Europe and beyond.

• The pound sterling is down about 6% from its level one week prior to the Brexit vote, which is a tangible confirmation that markets view Brexit as a negative for Britain, but not a huge one.

• Interest rates in the UK, Europe and US are meaningfully lower than pre-Brexit, which is consistent with the expectation that Brexit poses another headwind for global growth.

Finally, as we always counsel when trying to make sense of big headlines that generate market volatility, try to keep things in perspective.

• While Brexit is expected to dampen UK economic prospects in the near term, it does not fundamentally change the nation’s long-run economic potential. Likewise, it won’t necessarily alter the demand for UK goods and services, notwithstanding potential trade frictions in the nearer term.

• The UK never adopted the euro currency; this likely reduces the disruption that would result from the UK leaving the EU.

• It is very much in the financial interests of both the UK and the remaining EU states to continue to do as much business together as possible. Whether financial incentives outweigh the political remains to be seen.

• The UK economy functioned long before the EU existed. It will continue to function, with or without the EU. The UK could compensate for Brexit by shifting its economic game plan from Euro-centric to “global-centric.”

• In the final analysis, the long-term economic impact of Brexit is unknown. In terms of financial market impact, from this point forward the developments are as likely to be positive as negative.

In closing, here’s an intriguing thought to consider. The EU leadership opposed Brexit; the UK leadership overwhelming opposed Brexit; and voters in Scotland and Northern Ireland opposed Brexit. Meanwhile, Brexit carried the UK popular vote by a 52-48 margin, but it’s not at all clear that the referendum would carry today, considering market and other reactions since the vote. Given that the terms of Brexit will be negotiated by parties, all of whom oppose the idea, perhaps it’s not far-fetched to envision a Brexit that results in something that looks very much like the status quo. In other words, an agreement that permits free (or mostly free) movement of goods, services and people between the EU and the UK. Stay tuned.