“There are decades when nothing happens, and there are weeks where decades happen.” – Vladimir Lenin
For the past couple of weeks, financial markets have been dominated by the results of a vote from a country that represents roughly 4% of world gross domestic product (a monetary measure of all final goods and services produced in a period) according to the World Bank, and roughly 0.9% of the world population according to Trading Economics. The United Kingdom vote to leave the European Union is not insignificant, but these numbers certainly put it in perspective
Before we dive further into “Brexit”, let’s look back on the first half of 2016. It was a wild ride for equity markets. In the end, the S&P 500 (a broad measure of U.S. stock market performance) delivered a total return of 3.84%, but that masks significant volatility, particularly at the beginning and end of the period. The market was down 10.27% through February 11, 2016. From that point on U.S. stocks returned 15.73%. The final days of June included the highly uncertain “Brexit” vote and the annual rebalancing of the Russell indexes, two volatility-inducing events. Much of that is now in the rearview mirror, although the ongoing fallout from Britain’s vote to leave the EU will likely continue to influence markets in the coming weeks and months.
Back to Brexit and how it might affect financial markets. In the long run, fundamental values are unlikely to be materially changed in the European equity markets, including the United Kingdom. Negative interest rate policies will be the norm in the foreseeable future. All companies, financial institutions, and investors must adjust to this new reality. Markets have moved swiftly to account for an increase in uncertainty, and higher volatility in equities and the British pound are likely to characterize the near-term future. The U.K. economy, which was reasonably strong prior to the referendum result, will be negatively affected and may experience a recession. The impact to the U.S. economy is likely to be via spending as a result of consumer and business confidence. Although consumer confidence here in the United States has been slightly dented, we see continued support for consumer spending from low interest rates, higher wages, better housing data, and a healthy employment picture. From a stock market perspective, we expect volatility will continue to be elevated but at this point we believe the U.S. economy should continue to show modest growth, helping to support modest gains for equities.
It is important to remember that nothing is likely to happen quickly in regards to Brexit. There are a series of steps before we can fully assess the political path forward in the U.K., such as whether Scotland will have another referendum on U.K. membership, and the future of Ireland’s borders. The process started with the U.K. selecting a new Prime Minister, next Parliament must vote and inform the EU of the intention to leave per Article 50 of the Lisbon Treaty (probably no earlier than the fourth quarter.) Then, negotiations may begin in earnest in 2017 and could last through late 2018. Until negotiations are complete there are no material mandated changes in the way companies do business in Europe.
Back to the United States: the political “fun” returns toward the latter half of July, with both major parties holding their nominating conventions—two of the more interesting in quite some time. Volatility related to the election could accelerate into the debate season as we watch the two least-popular candidates in U.S. election history personally face off on policy.
The second half of 2016 is full of potential catalysts—including not only the specter of further Brexit turmoil, but also Fed meetings, a presidential election, corporate earnings, and incoming economic data. There will likely be a few surprises along the way. Times like these remind us not to get caught up with short term quick reactions and emotions. Investing is a long game and requires a long term perspective. Take time to put news stories into perspective before reacting. As always, we are happy to discuss these issues and any others with you.
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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