Quarterly Letter 06/29/2016
I was prepared to write our 2nd quarter letter about how nicely everything was going, but with the recent turmoil in Great Britain, I have decided to change topics and address it. With many clients contacting the office to ask how Great Britain’s “Brexit” decision to leave the European Union (EU) affects them and their account values, I thought it a good time to discuss four points to help explain.
The first point is simple: global markets are reacting with fear. Fear that other partner countries of the EU will decide to leave as well. If this happens, it could seriously fracture the union and de-stabilize it. The EU is one of America's largest trading partners and if they are not importing and exporting with us, our economy will start slowing.
The next point why the "Brexit" is negatively affecting our markets is confidence. The US stock market relies on positive consumer and business confidence. If markets continue to fall, we start to lose this confidence. That creates an environment of less buying by consumers and less business investment by companies, which could cause the markets to drop further.
The third point why the "Brexit" is not good for Americans is currency exchange. Since the announced departure of Britain from the EU, the value of both the Euro and British pound have dropped significantly against the dollar. This is great news if you are planning a trip to the UK or Europe in the near future, but if you are an American corporation trying to sell your goods, those goods have become more expensive for buyers. This means your business could suffer as the cost will become higher for the country trying to purchase goods, hence they buy less.
The last point why the "Brexit" is bad for the markets is the change of our Federal Reserve's policy. Last year, the Federal Reserve signaled plans to increase interest rates four times within the year which never transpired. Now, with the "Brexit" vote completed, chances are the interest rates will not be raised at all this year as well. Our economy may remain stagnant for an extended period of time.
With all the unexpected news about the "Brexit" vote, we will continue to look for a silver lining. The markets are pushing a reset button and taking a much needed break. After 7 years of growth, it is time to digest these gains and blow off some steam. This current drop should set up a nice rally in the future.