2016 2nd  Quarter Commentary

 THE “BREXIT” VOTE: WHAT IT MEANS TO THE U.S.

As most of you know, “Brexit” was the term used to describe Great Britain’s recent vote to withdraw from the European Union. All the polls were indicating that they would vote to stay in the E.U., so when the citizens of the United Kingdom voted to exit the E.U., it shocked the world.

In order to put the exit of the U.K. from the E.U. in context, it is necessary to revisit our last commentary, published March 31, 2016. In that commentary, we showed how the U.S. stock market had been stuck in a very volatile trading corridor for some time (as illustrated by the DJIA information below.) We explained that the U.S. stock market is like a horse trying to run and that the U.S. economy is like a cart that has been stuck in the mud of regulatory uncertainty. In fact, the US economy has never recovered from the Great Recession of 2008. The horse is trying to run but the cart is stuck. So if the horse gets too far ahead of the cart, it simply pulls back because the cart won’t move. Below is an illustration of the effect this has had on the Dow Jones Industrial Average since 01-01-2015:


01-02-15 05-19-15  11-03-15 02-01-16 04-20-16 06-23-16* 06-30-16  
High Points 17,832 18,312  17,918 16,449 18,096 18,011  17,929
Low Points 17,164 15,666 16,733 15,660  17,435 17,140
 01-30-15 08-25-15  01-20-16 02-11-16  05-19-16 06-27-16

* THE “BREXIT” VOTE OCCURRED ON 06-24-16.

Note that on 06-23-16 the Dow was at 18,011. The “Brexit” vote occurred on 06-24-16. Three days later, on 06-27-16, the Dow had dropped to 17,140. On 06-30-16 the Dow had recovered to 17,929. It appears that the “Brexit” vote was simply another event that has created additional uncertainty. As you can see, it has had a short term negative impact on the U.S. markets. However, the U.S. market seems to be recovering from those initial worries.

Obviously there has been a lot of volatility in the stock market since 01-01-2015. Note the returns of the following indexes since 01-01-15:

Returns – January 1, 2015 thru June 30, 2016

S&P 500 Index
+3.41%
Dow 30 Average +2.85%
MSCI EAGE (Europe, Australia, Far East) -2.66%
Russell 2000 Index -1.45%
MSCI Emerging Markets -6.68%

 

Even with all of the volatility, there has been very little return in the markets.

There is an unwillingness for companies to take on additional risk. We don’t think they will do so until more certainty returns to the economic & regulatory environments. The exit of the U.K. from the European Union could actually be a first step in working out more certainty moving forward.

The “Brexit” vote was an example of a free people exercising their rights in a democratic society. Americans, of all people, should have no reason to fear that process.

We hope you and your family had a Happy 4th of July!

 

Sources: Yahoo Finance, Morningstar, and the Wall Street Journal.

These are the opinions of Financial Professionals, Inc. and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly.  Past performance is not a guarantee of future results.