Newsletter: June 2016

02
Jul

Newsletter: June 2016

Thank Brexit for the early fireworks show

We endured an early fireworks show thanks to Brexit.  Everywhere we have looked in the last week we have seen or heard about Brexit. From the newspaper in the morning, to the financial news that plays all day in our homes and offices, to clients calling, to the intern who wouldn’t stop asking me about it- it’s all about Brexit. Once the surprising results were announced (so much for the wisdom of the British online betting parlors, which had us all convinced the “remain” side had this one in the bag) the wisdom of the herd theory kicked in, a classic knee-jerk reaction to big news, that is sell first and ask questions later. Judging by the snap-back stock market rally it seems Brexit (for now) is another momentary overblown panic. 

After markets hit the Brexit speedbumps Friday and Monday, by this last Friday’s close the Dow Jones Industrial Average was actually higher than the close the day before the Brexit vote. In the U.K, the FTSE-100 index closed with a net gain for the week, even after Friday’s big decline. We were looking at the overall damage starting last Thursday when folks believed that the Brits would vote to stay through the close this Friday. Through all this, including today's action, the Dow Jones is up. But boy what a short term roller-coaster! 4 nice up days with 2 ugly ones. 

Date

Dow

Point Change

% Change

23-Jun

18011.27

230

1.29%

24-Jun

17400.75

-610

-3.39%

27-Jun

17140.24

-261

-1.50%

28-Jun

17409.72

269

1.57%

29-Jun

17695.00

285

1.63%

30-Jun

17929.99

325

1.33%

TOTAL

 

238

1.32%

What Happened?

The Brexit was really a problem of Prime Minister David Cameron’s own making, seeing the referendum as a short term concession to a boisterous “Leave” camp. Cameron got this wrong and it cost him his job. He overlooked that the Brexit is seemingly part of a wider global backlash. This has given rise to a populist separatist sentiment that has resulted in the rise of nationalist parties across the western world. UKIP in England, Marie Le Pen’s National Front in France, and Trump’s ascent in the United States are all salient examples.

What will be the long-term impact?

As we see it, the impact on global growth and inflation on the cyclical horizon is likely to be minimal – and almost certainly not large enough to push the global economy into recession. Even if the UK fell into a recession, which is a distinct possibility, the direct knock-on effect on global GDP through lower UK import demand will be minimal (the UK accounts for only 3.6% of global imports of merchandize goods and 4.1% of global imports of commercial services)

In five years, we could remember the Brexit like we remember Greece last year or the 1998 Asian currency crisis. A momentary lapse in investor confidence (akin to a flat tire on a long road trip) and a decision that carries fewer market consequences than pundits are foreseeing. The UK did very well in its period inside the EU. It may continue to do as well outside it, that is if the true divorce really happens. Maybe they separate but still date afterwards? Some folks are now betting the “exit” will never happen as the EU referendum is not legally binding and may be reversed. Many of those who voted “Leave” on Thursday reportedly regret it, either because they did not really expect the leave vote to prevail or merely wanted to register a protest vote. Many feel they were betrayed, prior to the vote, by misinformation by pro-leave politicians. The most frequent UK Google searches in the hours following the Brexit were, “What is the EU?” and “What is Brexit?”  If there is one certain take away from the Brexit is that everything does not always sound smarter in a British accent. One client joked “the Brits are just mad because they have to munch on bad tasting snacks, eat kidney pie, and drink warm beer.” 

Have a Happy, Safe, and Fun-filled 4th of July!

As always, feel free to contact us any time to review your overall situation and particular needs.  We offer both portfolio management and financial planning (plus good old fashioned general advice) as part of our basket of client services.

If you would like to inform us of any updated contact information, please let us know as well.

Thank you,

Doug, Victoria, Randall, Ross, Patrick, and Colin

 

Advisory services offered through CONCERT Wealth Management, Inc., a Registered Investment Advisor.  Madison Park returns data provided by Portfolio Center.  Indices return data provided by Morningstar.