The July 2016 Insight
Adam E Bray CFP®
Chief Investment Officer
Political tremors create economic waves
On June 23, the UK voted in a nonbinding referendum to exit the 28-nation economic and political bloc called the European Union. Though "Brexit" was chosen by a narrow margin, the people had spoken.
Nonetheless, a victory by the "Leave" camp wasn’t supposed to happen. While the vote was expected to be close, pollsters, analysts, and even the bookies who took bets all projected "remain" would squeak through with a win. In advance of the vote, stocks rallied in anticipation "leave" would go down to defeat.
While these are longer-term concerns, there were a couple of immediate casualties. British Prime Minister David Cameron, who was adamantly opposed to Brexit, quickly resigned, and the British pound fell to its lowest level in over 30 years (Bloomberg).
Meanwhile, expectations of a second rate hike by the Federal Reserve have dimmed considerably. Of course, rate hike sentiment could change again, but for now, prospects for a 2016 rate increase are low (CME Group).
Let’s not discount the positives at home
Many of the themes that have kept stocks near highs continued to play out over the quarter that just ended. On the plus side, U.S. economic growth appears to have accelerated in Q2 and interest rates remain low. While Brexit may muddy the picture, earnings are forecast to begin rising again in Q3 (Thomson Reuters).
Meanwhile, the increase in oil prices has not only reduced the strong headwinds in the troubled energy sector, but it has reversed the surge in yields among junk bonds. Still, a fill-up at the gas station remains quite reasonable.
Moreover, the dollar’s recent stability reduces the drag on revenues from firms that do a significant amount of business overseas. When U.S. companies sell goods around the globe, they must translate those sales back into stronger dollars.
A rising dollar is gift for Americans traveling overseas, but it puts a dent in the bottom line of multinationals.
Table 1: Key Index Returns
|Dow Jones Industrial Average
|S&P 500 Index
|Russell 2000 Index
|MSCI World ex-USA**
|MSCI Emerging Markets**
Source: Wall Street Journal, MSCI.com; MTD returns: May 31, 2016—Jun 30, 2016; YTD returns: December 31, 2015–Jun 30, 2016; *Annualized; **in US dollars
What’s an investor to do?
Control what you can control – the investment plan – and be very careful about making a rash decision based on an emotional selloff. Stocks took a beating in the wake of the Brexit vote but quickly recovered nearly all of their losses by the end of June.
I understand that most investors don't fully understand the impact of what just happened in Europe in relation to their investments. Honestly, many analysts would concede there are unknowns. My goal, however, is to keep you focused on your financial goals and objectives. Emotionally based decisions rarely work out in your favor.
These are the opinions of Chief Investment Officer Adam E Bray CFP® and not necessarily those of Cambridge. The views expressed herein are for
informational purposes only and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested
into directly. Past performance is not a guarantee of future results.