Our Response to Brexit
TO: Our Clients
DATE: June 24, 2016
RE: Our Response to Brexit
First, we have been monitoring and analyzing the Britain’s potential exit from the EU from the beginning, and will continue to do so. In short, the Brexit outcome has created uncertainty and elevated levels of fear globally for market participants. However, are there any concrete reasons to be concerned or to react in a fearful way that would negatively impact your long term strategy? The answer is categorically “no,” as of right now.
What we are seeing with global markets today reminds me a lot more of the summer of 2011 than the fall of 2008. In the summer of 2011, the US debt was downgraded to AA by S&P, which sent temporary shockwaves throughout the market. There was a high level of fear, many investors behaved irrationally and dumped long-term strategies for short term safety, and consequently missed out on the recovery that came relatively quickly. In that case, there was a 3 month disruption, followed by a speedy ascent. Unfortunately, as is always the case, impossible to predict or take advantage of through market timing. The moral of the story is, by being patient and not overreacting, investors were again rewarded.
Today, the levels of fear indicate that they are rising (measured by the VIX), to levels seen in the summer of 2011. But, similar to 2011, it is based not on any fundamental issue, but rather uncertainty and irrational fear. In fact, the exit is yet to be negotiated and will likely be a 2 year process between Great Britain and the EU. To be sure, it might affect individual companies, but the impact won’t be known for sometime. Always keep in mind though, earnings and fundamentals still matter, and companies usually find a way to grow, expand, and make a profit regardless of challenges. The markets are incredibly resilient.
This does not seem like a 2008-2009 scenario. The good news is, central banks are used to crisis since 2008 and are well equipped to address the challenges faced through Brexit. There is currently no liquidity crisis. As one analyst pointed out just this morning, it seems more political than financial. When you apply that logic, there is little reason for panic.
Think long term, reflect on lessons from our recent past.
Craig C. Rogers
Rogers Wealth Group