To our Resonate family, your families and friends,
It is during times like these that your Resonate team chooses to stay especially close to you. We filter through much of the “noise” and attempt to distill out the “news.” I thought these observations from Stephen Leeb were of interest and hope you do as well.
Global markets are scrambling after the Brits voted to leave the European Union by a 52-to-48 margin. Interestingly, more than 3.7 million British citizens and U.K. residents have signed a petition calling for a second EU referendum. Clearly, many people did not understand the ramifications of Brexit.
Whether the U.K. now regrets Brexit or not, it seems the votes will count, and global investors must now deal with the fallout. Not surprisingly, as we noted last week, in the event of a Brexit stocks would likely dive for a few days. Indeed, the S&P 500 logged its worst day of the year on Friday; it fell 3.6 percent. Those hardest hit, of course are the companies who do the most business in Europe.
On June 27, the S&P was again firmly in the red, and shed another 1.8 percent. The drop in the U.K. market has been small, about in line with that in the U.S., but it’s partially masked by the fall of the British pound to a 31-year low against the dollar.
The U.K. must now negotiate with the EU for terms of breakup, though the “leave” campaign leaders state they will wait until summer vacations have ended despite the insistence of some within the EU that negotiations begin immediately. It’s possible the U.K. could enter a recession within a year as the uncertainty of the situation, among other ramifications, reduces business investments, tightens financial conditions, and levies possible negative impacts on trade.
Leeb urges investors not to read too much into the initial market reaction, but to pay close attention to how political leaders manage the fallout, which will have far more long-lasting ramifications. An orderly exit and dedication of EU leaders to keep the union and euro zone intact would help to minimize disruptions; if the European leaders allow the situation to get out of hand, however, which could lead to the breakup union, all bets are off.
Although the stock market volatility since the Brexit vote may appear reminiscent of the dark days of the Financial Crisis of 2008, this time there are no financial bubbles waiting to pop on the scale of that U.S. housing bubble. A full-blown financial crisis is unlikely, but due to the unprecedented exit and the uncertainty over what comes next, it is not surprising that the referendum has thrown global markets into turmoil.
Fortunately for U.S. investors, Brexit’s direct impact on the American economy should be, tangible, but small, perhaps shaving off a quarter of a percentage point from 2016 GDP growth. But again, the full scope of the Brexit fallout won’t be known for years, and the actions of the political leaders in the months ahead should provide telling clues. At this time, investors should not panic, but remain vigilant.
Easy as it may be to let Brexit and the associated drama distract us, it’s important that investors remember that the current drama will not materially affect the issues. Over the long term, the world must address many problems: specifically, resource scarcity, cyber security, and the transfer of power from the West to the East.
Not to mention a presidential election…
Until next time, live with purpose and remember who and what is most important in your life.