Brexit: The Dust Starts to Settle
Britain has a new prime minister, and the S&P 500 hits a new record high. Go figure!
While the aftermath of Brexit continues to be felt, it’s clearly reverberating in some unexpected ways. Stocks fell sharply after the vote, but have since rebounded both here and in Europe. The STOXX Europe 600, which fell 11% on the Brexit news, was down just 1.6% as of July 30th. The British pound is another story: its trajectory has been more consistently downward, at one point hitting a 30-year low. The euro has not fared too well, either. Volatility and a general sense of market unease have persisted as well.
There are (at least) two lessons to be learned from this. The first is the general unreliability of market prognostication. In the short run, no one can reliably predict how investors will react to events. The sell-off was sharp; the bounce back equally dramatic. The second is the need to continue to expect the unexpected, and to position your portfolio accordingly. Oddly, low probability events seem to be happening more and more frequently these days. That may say something about the times, or it may say something about the markets; but either way it’s worth keeping in mind.
For investors, liquid alternative funds can be used by those seeking to manage volatility, while currency-hedged funds can help address the potential shock of currency movements, which are often sudden and hard to predict. (We think 50% hedged is a good number.) There’s a sense that there are more shoes to drop post-Brexit. For trade agreements, market access, and the cross-border movement of people, the devil was always going to be in the details, and it will take time for those to emerge. There’s uncertainty, too, as to whether the UK vote is a one-off, or the start of a bigger unraveling for the EU. One thing does appear certain: the UK does appear likely to backtrack; Prime Minister Theresa May has loaded her cabinet with Brexit supporters and had declared her commitment to seeing it through.
Significantly in the US, post-Brexit uncertainty has caused the Fed to hold off on its campaign to lift interest rates, a positive for equities. The Bank of England, on the other hand, is generally expected to undertake its first rate cut in seven years later this summer. These moves may result in a further realignment in the currencies of the US, the UK, and the Eurozone, potentially dragging in the yuan and the yen as well.
We’re only a little more than a month into the post-Brexit era, so it’s early to draw any sweeping conclusions. Much will depend on the reaction of the EU and other EU members. With 4% of the global GDP, it’s unlikely that Brexit alone was ever sufficient to pull the global economy into recession. Still, it’s one more thing for investors to worry about, and one more reminder that we continue to steer our way through interesting, and unpredictable times.
Brexit is an industry term that refers to the June 23, 2016 referendum by British voters to exit the European Union. The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market (performance data assumes reinvestment of dividends, but it does not reflect management fees, transaction costs, or other expenses). The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. The STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region.
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