As anyone with internet access or a TV knows by now, the S&P 500 slumped 3.6% on Friday. This was the first 3% drop in 210 days AND it was the biggest drop since August 24, 2015. It was also the third slowest week in a row for the index since late 2015 / early 2016.
As it turns out, a drop this big near an all-time high is pretty atypical. In fact, there is only one other day since 1957 where the S&P 500 was closer to a new high and had a larger drop…and that was a 3.7% drop on November 15, 1991.
I published a blog last Friday with the details of the Brexit news so I won’t rehash those details here.
Not surprisingly, U.S. Treasuries and government bonds among the more financially stable nations in Europe rallied as some sought safety (Bloomberg). Not surprisingly, the British pound took a beating, losing 8% of its value against the dollar (MarketWatch). While the Dow’s one-day loss totaled 3.4%, selling was orderly (CNBC).
A lot of reading I did over the weekend can be summed up by what is quickly become a cliché statement on Brexit, “This is a political event, not an economic one.”
Well the political fallout may not be over. It turns out that the Scottish prime minister said a new Scottish referendum on independence from England was “highly likely.” Two years ago, Scotland overruled national independence in its own referendum amid fears over economic uncertainty. That didn’t play out in the Brexit vote. Additionally, Northern Ireland may follow a similar path.
Rules for exit are contained in what’s referred to as “Article 50” of the Treaty of Lisbon, which provides for a two-year process to negotiate new trade accords between the exiting member and the remaining members. But the UK may not invoke the article right away, which could further delay an exit and create added uncertainty. We’ll see how that goes.
If (when?) the accords are reached, they must be approved by 20 countries…and with at least 65% of the population…oh, AND ratified by the European Parliament.
If there is no agreement in two years, UK membership ends.
So Where Does That Leave Us?
No one has a crystal ball, but the big questions are:
- Will other nations consider exiting the EU?
- How might this impact separatist movements in Europe?
- Will it eventually tear the 19-nation eurozone (those who use the euro as their currency) apart?
- Will the dollar begin to strengthen amid worries about euro and global uncertainty?
- What will happen to an already fragile European banking system, which saw shares fall 7% on Friday?
- AND DRUM ROLL PLEASE….will the Fed hike rates this year?
I think the only people publishing that there will be at least one hike are the people who published that there will still be two, three or four in 2016.
My guess is Fed hikes are off the table for 2016. I stress guess.
But let’s stop looking at the politics and start looking at the economics. I’ve been saying for a while that growth, no matter how tepid, is still growth. While there are clearly weak spots in the current U.S. expansion, our economy, banking system, and consumer are in a better position today than 2008.
In fact, lost in the ruckus was that the Fed announced last week that each of the 33 U.S. banks that underwent its standardized stress test were able to stay above minimum required capital levels in severe economic and market conditions.
So there’s that. In case you missed it.
While it’s true that I give the consumer a lot of credit, I should also mention that business spending does remain kind of weak. This is a contributor to the shitty-ish, crappy (tepid, Dave, TEPID) economic recovery. I’ll submit that recession risks have edged higher after Brexit, but the reality is that most indicators do not point to a near-term recession.
We may see more volatility in response to Brexit in the coming days. (The Dow was down about 1.5% and the S&P 500 was down about 1.8%.) However, I think the most important thing for U.S stocks and investors over the medium and long-term is what happens to the U.S. economy.
That Leads Me To This Nugget
Control what you can control…which is basically nothing except your own behavior.
Volatility can create anxiety for some investors, but for those of you with a well thought out financial plan and investment strategy are designed to take this kind of stuff into account. It’s why we always say if you need cash, have it. The time to HAVE TO DO SOMETHING is not the day of Brexit or any other event.
Investors who make rash choices or take decisions based on unexpected events usually don’t profit over the longer term, and hinder the progress toward their financial goals.
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