“We’re Out of Here!”
A week ago I didn’t expect to be writing about the UK leaving the European Union, but here we are. Here are some of the relevant points that I think need to be thought about: No doubt this is bad for the UK. According to JP Morgan’s economists, it may take as much as 1% off of their GDP this year, and may even put them in a brief recession (negative growth). The Pound Sterling is at its lowest level in about 30 years and creates a great deal of uncertainty both about their economy and politically with PM David Cameron resigning. That being said, the UK stock market – the FTSE – may actually be supported by the lower Pound Sterling, as many larger UK companies get much of their income from overseas.
The Bank of England will probably put off rate hikes as probably will the US Federal Reserve and other central banks. They are not likely to tighten up rates until they see the outcome from the vote in the months ahead. Even though there is not a large correlation to the US economy, it will still affect our markets in the short term. There is not a large correlation to the rest of the Global Economy, either. The UK donates approximately 3-4% to the world’s GDP, according to the International Monetary Fund (IMF). Important, yes, but not dominant.
It was both a surprise and disappointment for many Brits – The “Stay In” group was complacent early and slow in getting support, and believing that the Bookies odds meant that there was large support to stay in. Poor weather helped keep those who were indifferent home.
There may be a “Domino Effect” from other counties such as Spain. In addition, since Scotland voted in a large majority to stay in the EU, we may see another referendum from them to separate from England. The broader political fallout will be a wildcard for the next few years.
There’s a very good chance that we will see the US markets bounce back in the next few months. The long term fundamentals in the US are going slow, but good. Keep in mind that nothing significant has happened from yesterday to today (nor next week) that will rationalize the US market falling nearly 3% as of this writing.
This is a referendum – nothing is going to happen in the short term – even in the UK for several weeks and months to change the global economies. But who’s saying the market is rational?
Back-and-forth in markets has been the theme that has dominated 2016, and this will be no exception. Investors in the US seem to believe that conditions aren’t as dire as they thought early in the year, but they are hardly optimistic about earnings and economic growth prospects. The “Leave” vote today may intensify these ideas.
Overall, I think the positives will win out over the negatives, but the near-term concerns mean risk assets (stocks) are unlikely to move up in a straight line. Next, expect to hear concerns over the Olympics in Brazil and of course, the U.S. November elections.
So, headline news will continue to dominate over economic realities, making investing uncomfortable. I believe the odds are very good that markets will weather these potential storms, but with some volatility.
Thanks for reading and as always, Thank You for Your Business.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Some of this research material has been prepared by LPL Financial. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly. Referenced Trading No: 1-510494.