The second quarter of 2016 was dominated by one word…BREXIT.
The news of the United Kingdom leaving the European Union sent shockwaves through global markets. The day after the vote, European equities declined by approximately 10% and US equities by more than 3%. Their decision to leave the EU created many uncertainties. The most notable are:
- Many US and Asian companies have operations in the UK so they can access the open boarders for free-trade. As the UK exits the EU, this access goes away creating fear that it may hurt the profitability of those companies.
- There are economists that predict the UK will suffer a loss in productivity and GDP for the long term, which would weaken their economy and government.
- The BREXIT decision could lead to other nations attempting to do the same, which would result in the instability of the region, and possibly the Euro.
- The actual negotiations and timeliness of the exit may cripple investment in that region due to uncertainty and result in a negative effect to the world economy.
Rhetoric coming from both the US Federal Reserve and world monetary officials subsequent to the decision suggested that world monetary policies would remain accommodative for the foreseeable future. That position, along with strengthening US economic data, led to a reversal in sentiment and new all-time highs in US equity markets in July.
Looking out over the next quarter or two, there are several factors that could influence market direction. Second quarter corporate earnings are on-average expected to show a decline. If there is a sign of growth or stability, it could result in another strong leg up in equities. With expectations low, if we see corporate CEO’s increase their earnings expectations, markets will be quick to re-price stock prices accordingly. Another factor will be the presidential election. Although it may create some short term volatility, the long-term effects on markets are typically minimal. Last, while worldwide terror events are horrific and incredibly disturbing, the long term effects on the markets are also typically minimal.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Happy Pokémon hunting!
Jason M. Vavra, CPA, PFS
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.