Contributed by Lewis J. Walker, CFP®
Brexit, the British vote to exit the European Union (EU), rattled global stock markets on Friday, June 24. Volatility is likely to continue. What does that mean to you as an investor?
Benjamin Graham, the father of value investing, stated, “The (stock) market is not a weighing machine, in which the value of each issue is registered by an exact and impersonal mechanism, in accordance with its specific qualities. Rather we should say that the market is a voting machine, whereon countless individuals register choice which are partly the product of reason and partly the product of emotion.” (Emphasis mine, LJW).
Sometimes, too, the market is a betting machine. In the weeks leading up to the British referendum, the global elites, including our president, weighed in in favor of staying within the EU. Global stock markets went up and down based on the latest surveys. In fact, on Wednesday, June 22, U.S. averages jumped on reports that British bookies favored a “stay” vote with good odds. The bookies were wrong!
The SPDR S&P 500 ETF Trust (SPY) dropped 3.64% on Friday the 24th. The media prefers disturbing words and headlines to perspective: stocks plunged, your 401(K), battered. Given the run-up on false hopes, the market gave that back and then some, dropping SPY to a level last seen in early May when some of the Brexit willies started to surface. Despite the drop, SPY, as a surrogate for the S&P 500 Index, closed on 6/24 at 203.13, up +12.2% from its 52-week low of February.
Yes, there’s fear that Britain’s move could spur “us too” votes by other EU members, cracking the EU trading bloc. Mr. Market does not like uncertainty. But, think about it. Great Britain was the third most important destination for German exports in 2015, as an example, and was Germany’s fifth biggest trading partner. Is Angela Merkel in a snit likely to trigger a tariff-driven trade war with Britain? Not likely. Will the English stop buying French wine? Pas probable! (Not likely!) Will winter-weary Englishmen stop flocking to Spanish beaches for summer holiday? No es probable!
President Obama in April warned that if Brexit passed, Britain would go to the “back of the queue” on trade deals with the U.S. Not likely! In fact, by Saturday, June 25th, the US, Canada, and Germany reached out to stress the importance of trade deals with Britain outside of the EU. So much for scaremongering! Under the Lisbon Treaty, Britain has two years to hammer out free trade agreements. Businessmen are still businessmen.
Britain has been a reluctant member of the EU all along, and did not adopt the euro as their currency, staying with the pound sterling. Economist Larry Kudlow on 6/25 posted an opinion that Brexit will be “good for freedom, good for growth.” The EU will continue to need Britain’s financial capabilities, indicating that “the Bank of England (is) a better operation than the European Central Bank.” Kudlow notes that Britain still is a member of the IMF, World Bank, G-7, G-20, WTO, NATO, etc.
For those not retired, continue to pour money into retirement plans and personal equity plays. If you are to “buy when there is blood in the streets,” don’t let the sight of blood unnerve you. Money managers are looking for bargains that always appear after any emotional rout. For retirees, we have long counseled having a “paycheck” fund, including insured savings and professionally-managed bond portfolios. Whenever there is a flight to safety, bonds benefit as prices rise and rates fall. In your “bucket strategy,” bonds provide a safety cushion. Interest rates are likely to stay low for some time as the Fed is increasingly cautious about raising US interest rates given a stronger dollar. There are screaming stock bargains in Europe and emerging markets attractive to money managers and patient investors. With your safety buckets in place, there is no reason to sell stocks.
Analyst Mark DeCambre, on MarketWatch, 6/26/16, published data showing that after the October 1987 Market Crash, the August 1989 Savings & Loan Crisis, the 1998 Asian Contagion and Russian Crisis, the 2000 Tech-Wreck Crash, and the 9/11 Terrorist Attack, within one year, markets were up, and significantly higher within three years. With the caveat that past results cannot be projected into the future,” it is best to follow the British dictum, Keep Calm and Carry On!
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group.