Market Digest – Week Ending 6/24
Equities had a wild ride this week with both domestic and foreign markets rising ahead of Thursday’s UK referendum, only to sharply sell off when official results showed Britain was leaving the EU. Investors fled risky assets and pumped money into US Treasuries and gold. Most foreign equity markets fell more than 5% on Friday, with 10-year US Treasury yields close to record lows intraday. The dollar strengthened against both the pound and the euro.
S&P 500: 2,037 (-1.6%)
FTSE All-World ex-US: (-2.3%)
US 10 Year Treasury Yield: 1.57% (-0.04%)
Gold: $1,318 (+1.5%)
USD/EUR: $1.109 (-1.7%)
•Monday – Global stocks rallied when polls showed a slight lead in favor of Britain remaining in the European Union.
•Tuesday – Fed Chairwoman Janet Yellen spoke to Congress, downplaying the risk of a US recession but stating the economy could experience slower long-term growth.
•Wednesday – Tesla offered to acquire SolarCity as Elon Musk attempted to combine his two companies. Investors reacted negatively to the news, sending shares of Tesla down more than 10%.
•Wednesday – In a closely watched IPO, Twilio was able to raise more money than expected.
•Thursday – All major US banks cleared the first part of the Fed’s annual stress tests.
•Thursday – British voters hit the polls to decide whether the UK should leave the European Union.
•Friday – Final results were announced in the UK’s referendum, with voters choosing to depart the EU. Prime Minister David Cameron resigned on the outcome.
Yesterday, the British people shocked the world by voting to leave the European Union. While surprising, and painful for anyone who made big bets on a “remain” vote, it was a textbook example of how capital markets function. Specifically, markets “price in” available information and are very good at handicapping the probabilities of outcomes. But the stock market can’t predict the future and binary outcomes like this one cause an immediate reaction. Early in the week, stocks were rising in anticipation of a stay vote and quickly adjusted when the result came in otherwise.
Friday was a big down day, but for the week domestic and foreign stocks only declined a couple percent. To us, that verifies our view that the decision by the UK matters, but shouldn’t overly concern US based long-term, diversified investors. The formal process for the UK to leave the EU will take at least a few years, and there is no way to know at this point how much friction or economic loss it will cause for Britain, Europe or the world. Estimates from the IMF suggest a 1% to 4% annual GDP loss for the UK over the next several years.
Brexit is important. It will have important ramifications for the future of Europe, may embolden Russia to be more aggressive, and could indicate an increase in anti-immigration sentiment globally which will be a key issue in the US Presidential election. Immediate implications include political change (Prime Minister David Cameron resigned as a result of the outcome), a double digit decline in the British Pound, increased likelihood of renewed succession efforts by Scotland, and increased odds of continued accommodative monetary policy from central banks.
Volatility will more than likely remain heightened in the coming days, but we don’t believe long-term investors should be reactionary. These are often the worst times to make drastic portfolio changes. UK stocks themselves make up just about 6% of the global market. We don’t see it causing meaningful systemic risk to the global economy or deciding the fate of the US stock market in the coming months or years. Bonds rose in the US and most major developed countries, once again demonstrating the benefits of multi-asset class portfolios.