Chris Lee and I sent out an email on Friday June 24th, the day after the historic vote in the United Kingdom where the British people voted to leave the European Union. We told you to be prepared for a negative market reaction to the vote in world markets and increased market volatility in the following months. While the Dow Jones was down by more than 600 points on the first trading date after the vote, many would be surprised to know that on the first day of July, the Dow Jones, S&P 500 and NASDAQ index were all higher than they were before the Brexit vote. This strongly suggests to Chris and I, that once again people who panic and let their emotions rule their investment decisions are more likely to lose money by selling low and buying back at higher prices. For those who understand that short-term volatility is the price to be paid for higher, longer term returns, they will be better positioned to achieve their financial goals.
I don’t want to imply that Brexit is a “non-event.” Quite the opposite; Chris and I know that many questions remain not just for the United Kingdom (UK) and the European Union (EU), but also for the USA and around the world. Brexit, along with future acts of terrorism, the seemingly endless Mid-East saga, the Zika epidemic, rising oil prices, declining oil prices or any other crisis du jour that our 24/7 news media bombards us with will certainly have an influence on us as investment advisors and how we consequently manage your money.
Of course the biggest question is: Will the EU break up? After all, the UK is the second largest economy in the EU. There are already renewed talks of a Grexit (Greece departing from the EU) other clever names have already popped up too. How about “De Partugal”, the “Czechout” and the “Big Finnish.” We can even bring the issue closer to home with rumors of Texas leaving the United States.
So is Britain the first domino? There are active political movements in the EU and other places in the world calling for more nationalistic and protectionist policies. If nothing else, the Brexit vote should serve as a wake-up call that the EU and other countries need to make structural changes and reforms. The EU has been struggling economically with issues such as: the Syrian refuge crisis, the Greek debt crisis, the potential Italian banking crisis, political and economic issues in Finland and Poland, AND in general the large wealth disparity between countries in northern Europe versus Southern Europe. This last issue should sound familiar to all of us in the United States who follow both Economics and Politics.
With the vote as close as it was (51.9% to leave vs. 48.1% to stay in the EU) there is already pushback against leaving. Scotland and Northern Ireland have made their desire to remain part of the EU known. Leaders of the “leave” movement in Britain are already walking back or reneging on promises made during their campaign.
In the end, both the UK and the EU may be fine. Britain is Germany’s third largest trading partner and France’s fifth largest. It doesn’t make sense for those countries to stop trading with Britain or to impose large tariffs on British imports. More interesting to me, would be if the EU does decide their policies need to be reformed and they change to a less-stifling regulatory environment. Such changes could promote economic growth for both the UK and EU.
Our international investments are down now but eventually, I expect them to rescue us when the American bull market expires. This is how proper asset allocation should work. When one asset class in down, another should be up. I wish I knew with certainty when that will be. Until my crystal ball becomes clear, we will remain vigilant and continue to allocate your portfolio under different asset classes for your long term benefit.
