I wanted to take a few minutes and share some thoughts on the approval of Brexit. I am writing this shortly after 7AM Friday.
• The S&P500 is down about 3.75% right now. This is 2+ hours before the US market opens. This is after the S&P500 was up well over 1% yesterday.
• Much of yesterday’s move was a result of optimism of a No vote on the Brexit. Not only were polls showing it looked like Great Britain was going to stay in the EU, but the so were the bookmakers. Interestingly, the bookmakers were considered more reliable than the pollsters when it came to a correct prediction.
• News will be moving fast and furious over the short-term with the impact of the Brexit. Right now Prime Minister Cameron has announced he will resign. The US Dollar and the Japanese Yen have both increased in value as investors are moving to safe havens. This does harm exports from these countries as they become more expensive. I read an article in the middle of the night that Japan will work to keep the Yen low and I would guess the odds of any increase in US interest rates is now off the table for the short-term.
• In addition to the potential moves in Japan and the US, the Bank of England came out this morning to say it had 250 Billion Pounds to inject into the economy if necessary. This helped calm the markets a bit. There was good timing yesterday in the US as the Fed’s annual stress test of banks showed they all had sufficient cash reserves.
• I certainly expect volatility to return to the market as the world figures out how Britain and the EU will work out this separation as this is unknown territory. The ripple effect of this vote goes beyond the EU as it impacts all countries and their respective corporations. Markets like things that are known and this is not that type of environment right now. The expectation is it will be several years before this has all unwound. Expect pockets of volatility for some time. I would not be surprised if the market ends up positive to close the day, although the chances are slight.
• If you are a trader the return of volatility might be great for you to take a gamble as to whether your guess is correct. For those of us who are investors it is time to talk to your advisor and make sure your portfolio is set up consistent with your individual plans. I cannot stress enough how important it is for you to understand and agree with how your investments are structured.
• Over the long-term markets always work through the environments surrounding them, whether it is wars, massive political upheavals, recessions, depressions, or the end of the world via Y2K. Feel free to reread my article on Bad Luck Brian and his terrible timing when it came to investments.
• Maintaining the long-term perspective during short-term volatility is easily one of the biggest challenges for any investor. During these times I am reminded of a quote from Benjamin Graham, the father of value investing and a mentor of Warren Buffett, – “To be an investor you must believe in a better tomorrow.”