Second Quarter 2016 – Brexit Shock
On June 23, Britain voted to leave the EU, referred to as “Brexit." We would term this development as a market and economic shock. International developed and emerging market stocks were up for 90 days prior to the referendum suggesting they were not pricing in a Brexit outcome. The initial shock of the unexpected outcome prompted a sharp decline in stock markets both in the U.S. and around the world and over a four-day period saw the DOW drop over 870 points or just under 5%.
Then, on June 28, markets began rebounding sharply on hopes that central banks around the world would help shore up liquidity and keep monetary policy loose. The gains left the Dow industrials and S&P 500 back less than a percentage point from their pre-Brexit levels.
We believe it may take some time for the shock to fully work through the economic, financial and political systems in the United Kingdom and Europe and longer-term Brexit-related risks remain.
The European Central Bank's top economist warned Friday that the vote could reverse recent improvements in the euro-area economy and see a return to recession in Europe.
As we move into the 7th year of the third longest bull market in U.S. history, the bull run is slowing considerably, especially in 2016 which started with the scary plunge fueled by fears of a global recession and worries about the downside of cheap oil. The U.S. economy is hanging in there, but should the impact of the British vote become harsher than expected, we may be forced to downgrade our longer-term view of both the U.S. economy and equities. We continue to believe volatility will remain a major characteristic of markets in 2016 and are holding our positions in investment grade corporate bonds and municipal issues, maintaining an underweight in international and emerging markets, deploying new monies to short duration bonds and high quality dividend-paying U.S. stocks, and keeping a higher percentage than usual in cash.