Questions of June 2016: What is Brexit?
A portmanteau of the words “Britian” and “exit”, it is the nickname for a British exit from the European Union. An organization that was created in 1993 with the aim of achieving a closer economic and political union between member states and the European Community.
The resulting challenge, is Brexit a shock for the markets or a true crisis?
The following statement was published by J.P. Morgan on 6/24/2016 following the Brexit vote. “Right now we do “not” think the Brexit shock poses an immediate threat to the global recovery. Over time, we expect the reality to be reflected in asset markets outside the UK, particularly in the US, where the stock market has reacted sharply to a result which would be expected to have only modest direct consequences for the US economy. However, it could take some time before the dust settles and investors should expect plenty of volatility, as UK policymakers and the wider world comes to grip with the consequences of the historic vote. We believe that the fallout should be manageable, if policymakers respond appropriately and investors keep their heads.”
The key point from the quote is “investors keep their heads”. The S&P 500 index did fall nearly 4% on Friday, June 24th but only finished the week down 1%. The next Monday it fell again but the end of the week it turned positive. The S&P 500 ended the quarter up 2.5%. That’s a very good return for a quarter filled with gloom and doom from the media. Major pullbacks happen every year with stocks for example in: July 2010 (-16.0%), October 2011 (-19.4%), June 2012 (-9.9%), June 2013 (-5.8%), October 2014 (-7.4%), February 2016 (-13.3). During this time frame the overall S&P 500 has increased by over 80%. Being patient and not over reacting has proven to work for a long-term investor. As we enter the second half of 2016, our expectation is that volatility will continue to be present in markets. We are suggesting that investors should maintain a balance and diversified portfolio. We’ve made several portfolio changes in our model portfolios that we believe will help overall returns. Bond markets continue to have very positive results in 2016 and are attractive investments for our moderate and more conservative accounts. Bottom line is: Active management provides a unique perspective and rebalancing portfolios can help keep your portfolio allocation in check, especially when navigating volatile markets.
This world event is A Shake the Tree Moment. A few leaves fell off but thousands of others continue to hold strong.