The World After Brexit by Worth Wray, STA Wealth Management
INSIDE THIS EDITION:
Brexit Vote Hammers Global Stocks
For What It’s Worth
Weekly Technical Comment
401k Plan Manager
Features Articles & Interviews
Brexit Vote Hammers Global Stocks
Written By: Luke Patterson
CEO & Chief Investment Officer
It is often said that investors “buy the rumor and sell the news”. This suggests investors often like to buy stocks in anticipation of good news and then sell once the good news becomes fact. But, what happens when Wall Street “buys the rumor” and then the news is not what the public expected? Pandemonium. Welcome to the aftermath of the Brexit vote.
Stocks around the world reacted sharply. In Italy stocks fell over 10% on the news. France and Japan both closed nearly 8% lower. German stock prices stumbled and so did those of the United Kingdom. The U.S. markets felt the global pull as well and the Dow Jones Industrial Average fell over 600 points on Friday with the S&P 500 down 3.5%.
As a reminder, the vote was a non-binding referendum, that the Prime Minister, David Cameron (who just resigned effective October) stated that he would implement however the results turned out. The Brits voted by a 52%-to-48% margin, with a large turnout (72%) to leave the EU.
Next in line is Article 50 being invoked and the exit negotiations which promise to be anything but smooth. This will likely take years. We will now have to wait to see how the future relationship between the UK and Europe manifests itself. Also, a contraction in the UK economy could be a result of this vote.
There will be elections in Spain on June 26th and in France, Germany, and the Netherlands next year. At issue, as with the Brexit vote, is whether and how this wave of anti-establishment and anti-globalization sentiment spreads.
While the EU leadership is pressing the U.K. Parliament to quickly invoke Article 50 and get the ball rolling for negotiations – at that point, it will be next to impossible to turn back – Prime Minister Cameron, who intends to stay on until October, has said repeatedly that there will not be any move before then to pull the trigger. As long as Article 50 is not triggered, the U.K. remains an EU member.
This is not about business insolvency or a financial event in and of itself – it is about shifting politics… but the resulting shock to foreign exchange markets does have the potential to unleash a series of shocks around the world.
We’re effectively on watch for additional disruptions.
While the vote is a negative shock to a global economy which we have already been discussing and writing about the possible impact. We also discussed and wrote about how the fundamentals of the economy has been deteriorating. In last week’s report, we covered “Economic Risks are Rising”, “Fear Gauge is Rising”, “Oil Falls While Gold Surges”, “Treasury Yield Tumbles to Four Year Low”. STA’s Chief Economist and Macro Strategist, Worth Wray wrote a good piece entitled “ Coming Storm: 10 Reasons to Take Cover” in our June 6th report. It would be difficult to see how the messaging to our clients and readers could have been better in retrospect.
The bigger questions are (1) are the economic fundamentals deteriorating to the point that it brings us to recession, and (2) can the weakening US economy handle the impact of foreign financial shocks. That in my view is the ball to keep our eye on, and we will be looking for the early signals.
The market does not like the uncertainty that this Brexit brings, but there has been the proverbial “flight to safety” which includes precious metals, U.S. dollars, and high quality bonds.
We consider ourselves in good position to weather a volatile market at the moment. Our Investment Committee has positioned the portfolio to be more defensive, and the same has been recommended in the 401k Plan Manager:
This year our larger portfolio themes have been to continue buying quality bonds and raise cash.
It is clear in the charts below in the Weekly Technical Commentary that investors were horribly blindsided by the Brexit vote. It should not have caught our readers by surprise.
For What It’s Worth… The World After Brexit
Written By: Worth Wray
Chief Economist & Global Macro Strategist
- UK voters delivered an enormous blow to global stability last week when they chose to leave the European Union. This “Brexit” event represents both a short-term shock to global financial markets and a lingering catalyst that has set the world on a more dangerous path.
- What happens next is anyone’s guess. The selling pressure in global markets may subside in the coming days as the initial panic begins to wear off and demand for safe haven assets begins to fall, but I’m afraid the knock-on effects of the Brexit shock will make it far more difficult for central banks to maintain global stability for any meaningful period of time.
- Fortunately, we saw this sell-off coming along with its various knock-on effects and positioned client portfolios across relatively defensive investments well in advance.
- Looking ahead, we see a series of risks capable of driving the US dollar higher, commodities lower, and ushering in a major bear market. In addition to weakening US economic growth and the ongoing earnings recession I’ve written about in recent reports, risks notably include (1) European capital flight and bank stress, (2) Japanese foreign exchange intervention, and (3) a Chinese currency devaluation.
- It may sound a bit scary, but falling prices are critical to restoring attractive long-term fundamentals and setting the stage for more attractive investment prospects. While we will continue to follow our tactical discipline by attempting to buy into pockets of weakness and selling into pockets of strength, we believe the BIG opportunities lie at the beginning of the next business cycle
Did Brexit Just Break the Global Recovery?
Just as I warned in my June 6 letter (“Storm Warning: 10 Reasons to Take Cover”), UK voters delivered an enormous blow to global stability last week when they chose to leave the European Union.
It wasn’t a landslide by any means; nor is it necessarily binding. But after most investors assumed the tide had turned in favor of a “Remain” vote just days before the referendum, the final decision delivered one of the largest political shocks in modern history.
As you can see in the poll results above and the charts below, the “Brexit” debate has left the United Kingdom sorely divided.
While most of England and Wales favored leaving, dominant majorities in London, Scotland, and Northern Ireland voted to remain in a vote that divided British subjects along geographic, socioeconomic, and generational lines. [If you’re interested in the specifics, feel free to check out my June 24 update video outlining the referendum and its likely implications.]
Despite all the hyperbole you may be hearing on CNBC or reading about in the New York Times, it’s too early to say how this story will play out for the