Brexit Implications – June 25, 2016

“This too shall pass” – Unknown

Brexit, Brexit, Brexit! Should it send stock market investors to the exit? The short answer is no for long-term investors.

Through the close of business on Thursday, June 23rd, the Standard & Poor’s 500 Index (“S&P 500”) rose approximately 2% from the previous week. The gains were fueled by investor’s perceptions that the United Kingdom referendum on leaving the European Union would be in favor of “remain.” Alas, the market’s perceptions were as soggy as the UK weather that day, and the “leave” camp prevailed.

This fracturing of the European Union, and uncertainty on the terms and complexity that this “leave” process will entail, roiled the world currency, bond, and stock markets. The surprise result turned optimism into fear as markets opened on Friday. The British pound lost over 8% against the US dollar while the main European stock market indexes in Germany, France, and the UK were down approximately 7%, 8%, and 3%, respectively. This was a classic case of sell first and analyze the facts later.

In the United States on Friday, the S&P 500 erased its weekly gains, and then some, by declining 3.59%. The S&P 500 index is down less than 1% during 2016 and down just over 4% from the 2016 high it reached just over two weeks ago.

Expectations for a rate hike by the Federal Reserve later this year are probably off the table now. The Bank of England (BOE) will likely cut rates to help their economy due to all of this turmoil. The Bank of Japan and the European Central Bank are also likely to cut rates. Currently, the futures market in the U.S. is only pricing in a 10-15% chance of a rate hike for us by February 2017.

As investors flocked to safety, the yield on the 10-year U.S. Treasury note moved lower and mortgage rates decreased as well. In case you have thought about refinancing your mortgage or are considering buying a new home, current mortgage rates are approximately 2.75% for a 15-year fixed rate mortgage and 3.25% for a 30-year fixed rate mortgage.

As fundamental investors, we review a company’s financial characteristics and its future business prospects when making investment decisions. We recognize the significance of the Referendum in the UK and are reviewing our investment portfolios for any adjustments that may be warranted. The U.S. stock markets should remain one of the relatively safer places to invest, but our markets could still be negatively impacted from volatility in the worldwide markets.

There are many unknowns concerning the Brexit and we are going to continue to monitor the situation. However, keep in mind that this isn’t a financial event like 2008. This is a political event that will have some short-term and long-term trade and economic impacts for the world, but these events will likely take years to play out. Remember, the United Kingdom had a long and prosperous history before joining the European Union and we believe they will continue to thrive for centuries after their exit.


Marietta Wealth Management, LLC