Calexit Referendum Highlights America’s Growing Divide

California residents are so dismayed over Donald Trump’s presidential election that they are considering leaving the United States to form their own republics. While Trump secured at least 290 electoral college votes, liberal California backed Hillary Clinton in overwhelming numbers. More than 61% of Californians voted for Clinton, the highest turnout for a Democratic nominee since President Franklin D. Roosevelt in 1936.[1]

In Spring 2019, Californians will have the opportunity to vote in a referendum on California’s future in the United States.[2] The so-called Calexit highlights the growing political divide within the United States, but also has major economic and financial repercussions.

California is America’s largest state both in terms of population and gross domestic product (GDP). A vote to leave the union will have a major impact on the US economy and the financial markets, which loathe uncertainty.

To get a sense of how the market would respond to Calexit, it’ may be useful to reflect on investors’ response to Britain’s exit from the European Union earlier this year. The so-called Brexit triggered the biggest loss in global equities on record. A whopping $3 trillion in paper losses were reported mere days after Britain’s historic vote.[3] At the same time, the British pound sold off in record fashion, eventually reaching its lowest level in 168 years. [4]

While a Calexit result may not have the same impact, it would certainly trigger uncertainty in the market, leading to doubts about the health of the US economy without its largest economic contributor. As it currently stands, California’s $2.5 trillion annual GDP would make it the sixth largest economy in the world ahead of France, India, Brazil, Canada, South Korea and Russia.[5]

In terms of stocks, the technology sector could face the biggest short-term backlash. California is home to Silicon Valley, which houses the world’s biggest tech, social media and e-commerce companies.

It wouldn’t just be technology that’s impacted. Shares in the energy, consumer discretionary and healthcare sectors may also face major consequences should Calexit materialize. The performance of the US dollar, the world’s preferred transaction currency, might also be at risk of devaluation.

YesCalifornia, a pro-Calexit group, has issued nine compelling reasons for seceding from the United States. Among them are trade and regulation, debt and taxes and health and medicine. A Calexit might therefore trigger widespread speculation around these important subjects, which have direct implications on the US economy as a whole and the performance of its financial markets.

[1] Cristina Silva (November 12, 2016). “Will California And Oregon Leave The Union? Facts About CalExit And Demcrats’ Secession Movement.” IB Times.

[2] YesCalifornia. The 2019 #Calexit Independence Referendum.

[3] Matthew J. Belvedere and Peter Schacknow (June 28, 2016). “After $3 trillion in post-Brexit paper losses, global markets bounce.” CNBC.

[4] Mehreen Khan (October 12, 2016). “Pound slumps to 168-year low.” Financial Times.

[5] Statistics Time (October 21, 2016). List of Countries by Projected GDP.

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