Brexit- Should I stay or should I go?
In 2016 the market has shown it is not without inspiration. The first quarter played host to a myriad of concerns, mainly energy weakness and the Federal Reserve’s December 2015 decision to raise interest rates. This caused a rocky ride for investors in the first quarter.
|Market/Index||2015 Close||As of June 30||Month Change||Quarter Change||YTD Change|
|Fed. Funds||0.25%-0.50%||0.25%-0.50%||0 bps||0 bps||0 bps|
|10-year Treasuries||2.26%||1.46%||38 bps||-33 bps||-80 bps|
The second quarter brought a new concern: Brexit, the U.K. referendum to leave or stay in the European Union. Leading up to the June 23rd UK vote we heard many predictions about the final vote outcome and the potential fallout. The sentiment from the investment and political community was mostly negative, predicting bad things to come should the U.K. leave the European Union. Well, against those dire warnings the British people indeed voted to leave, and the next two days all hell broke loose in the world’s stock markets. The S&P 500 lost about 5.35% over the two-day period but then staged an impressive rally through the quarter's end and into the third quarter, ultimately making an all-time high on 7/12. The new high is impressive because the market has been moving sideways since the last high of May 2015. Historically, stocks are higher 6 and 12 months after reaching new highs following periods of consolidation. I suspect this time will be no different.
Based on the market’s strong action following the Brexit vote it would seem investors are not overly concerned for the outcome. If you recall, the U.K. has its own currency, the Pound Sterling, and currently runs a trade deficit with continental Europe, thereby requiring the EU commission to play nice with England in exit negotiations. The selling after the vote now looks like a panic buying opportunity.
One significant outcome of the Brexit vote is another down leg in global interest rates, including the 10-year Treasury yield falling to a new all-time low. This in turn will should further the cycle of mortgage refinancing and home ownership. While these low rates are not very attractive to fixed income investors they do reinforce the attractiveness of stocks.
Thank you for your confidence.
Nadim Joseph Nahas