Brexit and the Longer Term – June 29, 2016

We witnessed a political earthquake in Europe, as the UK voted to leave the 28-nation European Union (EU). It wasn’t supposed to happen, per the pollsters.

  • The collective wisdom of the market got it wrong.

Immediate reaction creates uncertainty and a shift to safer assets—

  • Stocks declined.

  • Odds of a 2016 Fed rate hike fell (CME Group).

  • U.S. Treasury yields, many European bond yields declined.

  • The British pound and euro fall; the dollar and Japanese yen rise (Bloomberg).

Longer-term concerns—

  • Could the EU splinter?

  • Could the viability of the euro be threatened?

  • Uncertainty, as the “divorce” could take two years or more.

Will the political earthquake create an economic earthquake for the U.S. economy?

  • A sustained rise in the dollar, if it were to occur in response to global uncertainty, would create modest headwinds to U.S. corporate earnings.

  • Unlike 2008, U.S. banks are better capitalized, and the U.S. is not currently in a recession.

  • While odds of a recession have ticked up, it’s unlikely to create a “Lehman-like” event at home.

 

Bottom line: U.S. markets have historically looked past international shocks over the longer term. The Asian currency crisis, Russian default, Arab spring, Japan’s earthquake, and the 2011/12 eurozone debt crisis come to mind.

Short-term volatility may continue, but U.S. markets historically play off U.S. fundamentals longer term.

Created 2016-06-29 16:04:14

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