On June 23, United Kingdom (UK) voters sent shockwaves through financial markets around the world by opting to leave the European Union (EU) by a 52% to 48% margin. The vote, commonly referred to as “Brexit” (by merging Britain and exit), sent the British Pound to a 31 year low versus the U.S. Dollar. Prime Minister David Cameron, who led the campaign to remain in the EU, announced his resignation and plans to step down in October.
The vote to leave sent investors fleeing as the S&P 500 fell over 110 points (-5.34%) by the time the stock market closed on Monday.
What is next?
For the UK to reclaim sovereignty from Europe it has to invoke an agreement called Article 50 of the Lisbon Treaty, which will start a two year period of negotiations on terms of withdrawal. We anticipate the departure to be a long and difficult process.
Will there be more to leave? The growing risk of fragmentation across the EU will continue to create political uncertainty and risk for European assets. Global markets may face additional volatility as the risk of a UK recession and further contagion is now elevated.
Our Investment Approach
For much of 2016, we have been recommending a more defensive posture across all investment strategies, which implies smaller allocations to stocks in favor of cash, bonds, and income oriented strategies. Heading into June, both the Fed’s indecisiveness and looming Brexit vote were further reasons to remain cautious.
And if the Fed and Brexit weren’t already enough to worry about, declining corporate profits in the U.S., conflict in the Middle East, global recessionary conditions, and even new concerns over further Chinese Yuan devaluation are all reasons to tread carefully this year.
We would like to remind investors to stay calm and not react emotionally to the market’s knee jerk reactions. If you are losing sleep over Brexit, it might be worth considering whether or not your investments appropriately match your risk tolerances.
If you would like to discuss your portfolio and whether it’s prepared for the potential volatility ahead, please contact GGM Wealth Advisors.