“That’s Great, it Starts with an Earthquake”

“That’s Great, it Starts with an Earthquake”

Brexit takes traders by surprise

KNUTSFORD, UNITED KINGDOM - JUNE 24: A European Union flag, with a hole cut in the middle, flies at half-mast outside a home in Knutsford Cheshire after today's historic referendum on June 24, 2016 in Knutsford, United Kingdom. The results from the historic EU referendum has now been declared and the United Kingdom has voted to LEAVE the European Union. (Photo by Christopher Furlong/Getty Images)

KNUTSFORD, UNITED KINGDOM – JUNE 24: A European Union flag, with a hole cut in the middle, flies at half-mast outside a home in Knutsford Cheshire after today’s historic referendum on June 24, 2016 in Knutsford, United Kingdom. The results from the historic EU referendum has now been declared and the United Kingdom has voted to LEAVE the European Union. (Photo by Christopher Furlong/Getty Images)

In reading the mountains of commentary and participating in the myriad of conference calls this morning in regards to the Brexit vote which caught the markets by surprise, several analysts have used the term “Earthquake” in describing this event. Repeatedly, the opening words from the R.E.M. hit, “The End of the World as We Know it,” which forms our title above, spring to mind. Predictions of global economic disaster are filling the front pages, and I’m sure there will be much more to come over the following weeks, months and possibly even years.

Unlike an actual earthquake, this event was one where we could actually predict the exact date and time of its occurrence. Indeed, many people looked forward to today knowing the markets would react with great gusto in one direction or another. I think it’s fair to say that few people expected a flat market today… I for one did not.

I don’t want to diminish the size and scope of the event, but in general, we do not expect there to be the deep destruction predicted in many headlines today. However, there are a couple of key points for investors I wanted to pass along:

  • This clearly has been an “earthquake” for the political elite in the U.K. Expect significant changes in government and policy there, as is already being evidenced by the resignation of Prime Minister Cameron
  • There will be short term financial shocks, primarily to the U.K., and to a lesser extent to the E.U. We expect the financial implications on the U.S. to be minimal.
  • Keep in mind that this is a political event, not a market structure event like 2008. All financial markets report operations are orderly and fully functional around the globe.
  • Also keep in mind that while the U.K. was an E.U. member, they did not participate in the Euro as their currency. The Euro is surprising stable (down less than 2% as I write this).
  • Rather than putting uncertainty to rest, the move adds uncertainty to the market, which likely means lower rates for longer and higher equity volatility for the time being.
  • Though the U.S. market (as represented by the Dow Jones Industrial Index) is down over 500 points today, it was up over 230 points yesterday… diminishing the significance of this one-day move. As of right now, the Dow is down less than 1% for the week… which doesn’t seem to justify all the noise.
    Dow Jones Global Indexes 6.24.16
    http://money.cnn.com/data/markets/dow/
  • It appears Scottish voters voted overwhelmingly to “Remain.” It will be interesting to watch what develops in the Scottish-British relationship going forward.

Overall, today’s market reaction (and the trading rally leading up to it) are examples of emotion taking over in trading decisions and leaving well-reasoned, sound investing principals behind. If history is any guide, emotional reactions such as this often prove as opportunities for those who can ignore their emotions and apply unwavering discipline in regards to their investment plan.

As always, feel free to contact your Cascade Advisor if we can answer any questions and remember:

Plan Wisely, Invest Confidently, and Enjoy Life!