Brexit and the Markets

Brexit and the Markets

| June 24, 2016

Today we received the unprecedented news that the United Kingdom (U.K.) has voted to leave the European Union (EU), which led to significant volatility in the global markets. In situations like these, it becomes more important than ever to harness our emotions, and stay committed to our long-term plans. Although this result was surprising, we had prepared client portfolios for its possibility in recent weeks by reducing and hedging stock market exposure.  We're now looking to use that "dry powder" to take advantage of any extreme market declines that may come in the next couple weeks or months.  As an investment advisor, I am here to offer continued support and guidance through these challenging market events, and if you're a client, rest assured I'm managing your account every day to navigate this turbulence. 

Yesterday, June 23, the United Kingdom (the U.K., comprised of England, Scotland, Northern Ireland, and Wales) undertook an all-country referendum about whether the U.K. should stay in or exit the EU, which it has been a member of since 1975. This vote, referred to as the “Brexit” vote, is done by allowing all citizens to cast their ballot on whether to “remain” or “leave.” In a very close vote, “leave” brought in 51.9%. 

In the days immediately before the vote—although it was expected to be close—the polls suggested a slight tilt that the U.K. would remain; financial markets reacted positively, with stocks around the globe rising in value, along with most foreign currencies. Early Friday morning overseas, as it became clear that, in fact, the U.K. had voted to leave, these recent gains were reversed and there have been sharp declines in global equity markets, particularly in Europe and Japan. European currencies have also weakened relative to the dollar. Essentially, the markets expecting a “remain,” were surprised by a “leave,” and thus are reacting negatively. 

Though the questions surrounding exactly how and when the U.K. extrication from the EU will happen has caused near-term financial turmoil, the actual “leave” vote does not create an immediate change in the day-to-day functioning of the markets. Rather, it’s the beginning of a process that may take two years or more to fully execute. However, in the short term, there is some additional uncertainty politically: U.K. Prime Minister David Cameron has already announced his intention to resign. There are also upcoming elections in other European countries, including Spain, this weekend. All of these just raise more questions than the markets typically like to see, which is causing this near-term turmoil. 

However, as the market gets over the Brexit shock and answers start to come on other fronts, this turmoil should settle down. The global economic system is better prepared to deal with financial panics than it has been historically. Most global banks are in much better shape than they were leading up to the financial crisis in 2008, and central banks are prepared to extend credit to institutions and countries to help them manage short-term liquidity problems if they arise. 

The United States is insulated, though not immune, from events overseas. Although there has been a decline in U.S. stocks early today, it is smaller than the declines in foreign markets. The U.S. economy and the U.S. stock market are built on a foundation of domestic consumption of goods and services. Our economy is impacted by events globally, but it is not dependent on them.

In times of financial market stress, we must remember our investments are for the long term. This is a time for caution, but not panic or overreaction. We must maintain a patient, long-term focus on the future. Some volatility may persist in the short-term, but, if history is a guide, should provide profitable opportunities for those of us looking for them. 

I am here to help you understand these challenging events and manage your investments in such a way as to benefit from them. As always, if you have any questions, I encourage you to contact me. 

Thank you for your continued trust and confidence.