June 27, 2016
Over the years, various events have become etched into everyone’s memory that appeared to be highly newsworthy at the time they happened, only to grow in diverse ways as to their ultimate historic significance. Some of these events became famous for their global economic & political impact (the collapse of the Berlin Wall), while others became known for what did not happen (the Y2K computer clock conversion).
The surprising outcome of this past Thursday’s referendum by the people of the United Kingdom (UK) to leave the European Union (EU) is likely to become one of those events, permanently pinned onto the news calendars in our minds, yet needing time to mature to determine its true historical impact.
The event, which has become known as the “Brexit” vote, will possibly be remembered for two different reasons:
- The first, being that there was a rising expectation right up to the day before the June 23, 2016 referendum that the final vote would be for the UK to remain a part of the EU, and the resulting shock of a contrary outcome causing the global equity markets to fall and drive currencies markets to seek “safe haven” alternatives.
- The second reason will be for how it will impact the future internal relations of the UK members themselves (Scotland, Northern Ireland, and Britain) as well as the economies of all the remaining countries still within the European Union, and those of all of their global trading partners.
- The immediate negative reaction of the markets can be directly explained by the longer term uncertainty, as there is a formal “two-year” process before a member country can actually leave the EU but no actual plan in place for the UK to do so. Unfortunately, the focus that should be devoted to addressing the economic needs of the region will now be compromised by the political & legal initiatives of the opposing parties involved.
Despite all of the recent efforts of United States Federal Reserve officials and global leaders in Europe and Asia, targeted economic growth has been difficult to generate for some time, and had been showing signs of slowing even before the Brexit vote. The leaders now need to concentrate their efforts to even a greater extent to stop the economic weakness from accelerating & starting a global recession.
The uncertainty as to how they will respond, and their ability to be successful in their efforts, will
probably cause the current volatility and risk within the markets to remain with us for some time. The pending Presidential election in the US and the political & economic changes taking place in Asia & Latin America will only add to this uncertainty & increased volatility.
The S&P 500 had been up for the week, was close to testing new highs prior to Friday’s selloff, and closed only modestly lower for the week overall. Riskier investments like small cap companies suffered the most, while interest sensitive investments proved to be a safe haven.
Coupled with global inflation still below desired range, the chance for any meaningful increase in interest rates continues to be very low. Going forward, while stock markets often do well climbing a “wall of worry” when interest rates are as supportive as they currently are, slowing global growth could have an offsetting negative impact on future corporate profits and market valuations.
This coming week could be a good time for checking on how recent gains may have affected your portfolios, and for rebalancing the holdings to align with increased risks & uncertainties. The US markets have held up better than the international markets, and will probably continue to do so for the near term. Those companies that have exposure to the emerging markets may outperform once currency fluctuations settle down, along with real estate & consumer staples/discretionary investments that could benefit from the low interest rate environment.
We recommend that everyone should review the amount of emergency reserves that are being maintained, and remember to keep a “cash is king” voice regularly playing inside your head. Having the extra cash will serve as a buffer in down markets, and provide funding to take advantage of valued “sale price” opportunities when they arise.
It is times like these that sticking with time-tested investment fundamentals becomes critical. Funds in an investment portfolio should be prudently diversified & targeted for the appropriate amount of risk for each individual investor. These funds should be allocated towards a longer term time frame before accessing to allow for “bad timing” to be offset by the general tendencies of prices to move higher over time.
If portfolios are properly structured, the philosophy of “staying the course” becomes easier to adhere to and provide fewer reasons for panic during tough & uncertain market conditions.
Please feel free to call us at 732-739-8991 or email us at Plan@ShapiroFSG.com with any questions about Brexit or concerns regarding your particular financial situation.
Kenneth B. Shapiro, CPA/PFS, CFP®
President – Shapiro Financial Security Group, Inc.