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Market Recap – What Brexit?

Market Digest – Week Ending 7/1

Stocks fell on Monday and then roared back from the initial two days of Brexit sell-off. US and Emerging markets stocks finished the week back at levels from before the historic vote while international developed markets are still down a few percent. There was no apparent catalyst for the rally, which surprised many investors. Outside of Brexit, Q1 US GDP growth was revised up to 1.1%, 31 of 33 big banks cleared Fed stress tests, and snack giant Mondelez offered $23 billion for Hershey’s. So far the deal has been rejected by the Hershey’s board.

Weekly Returns:

S&P 500: 2,103 (+3.2%)
FTSE All-World ex-US: (+4.3%)
US 10 Year Treasury Yield: 1.44% (-0.13%)
Gold: $1,341 (+1.7%)
USD/EUR: $1.113 (+0.4%)

Major Events:

•Monday – Medtronic agreed to buy HeartWare International for $1.1 billion.
•Tuesday – Volkswagen agreed to pay $14.7 billion to settle emissions cheating claims in the US.
•Tuesday – Lending Club announced it discovered that the former CEO and his family took loans on the platform to boost the company’s figures in 2009.
•Tuesday – US Q1 GDP growth was revised up to 1.1% from the previously estimated 0.8%
•Wednesday – The EU signaled it would review Bayer’s proposed acquisition of Monsanto.
•Wednesday – GE Capital successfully shed its “systemically important” label.
•Thursday – Fed stress tests cleared 31 of 33 big US banks, allowing them to return more capital to shareholders. Banco Santander and Deutsche Bank failed while Morgan Stanley was given conditional approval.
•Thursday – Boris Johnson, the presumed front-runner for British Prime Minister in the wake of Brexit surprisingly withdrew himself from consideration for the role.
•Thursday – The Bank of England’s Mark Carney hinted at a summer rate cut, putting pressure on the British Pound but causing stocks to rally.
•Thursday – Snack giant Mondelez made a $23 billion offer for Hershey’s which was quickly rejected by the board.
•Thursday – Apple was rumored to be in early talks to buy Tidal – Jay Z’s high end music streaming service.

Our take:

What Brexit? Markets were quick to shrug off concerns about Britain’s historic decision to leave the EU. US stocks rallied back to levels immediately prior to the vote. But the week was not without drama. Boris Johnson, the presumed front-runner for Prime Minister, abruptly announced he would not seek the office. It is not yet known what happened behind the scenes, but it seems to foreshadow that nothing will be easy to predict in the long and winding road to come for the separation to be implemented.

Brexit may end up being good for Britain in the long term, but it is hard not to view it as a bad thing for Europe in general. It increases the risk of further fragmentation of the union, which we don’t think global stock markets would be able to dismiss so easily.

As for stocks, Brexit is just one factor among many. We don’t think it should cause long-term investors to deviate from strategic asset allocations. But it will cause more bumps and we expect market volatility, which has been mostly absent since February, will increase in the second half of the year. Bond markets seem to agree, with the US ten year Treasury yield dropping to 1.45%.

From all of us at Personal Capital, we wish you a very happy 4th of July. Ironically, we’ll be celebrating our own form of Brexit.

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