Thoughts {06.24.16}

Great Britain voted to leave the European Union yesterday.  The early repercussions are that British Prime Minister David Cameron has announced his intention to resign and global markets are seeing declines in the 3-8% Range.  The US markets look to be down around 3%  on the open as of this writing.  The reason for these declines is that global markets had priced in over the last week a "remain" victory.  Two weeks ago it started looking like "leave' would win in Britain.  Then circumstances and the odds seemed to shift in the "remain" camp's favor and the investment community largely placed its bets by following the odds.  Now, in Wall Street speak the short-term investment community is "offsides".  That is more of these investors ended up betting on the wrong side of the trade and now they have to do whatever possible to take as much risk off the table.  If "leave" had been seen as winning all this time then it is likely stocks would be seeing less of a reaction today.  Of course we might already be trading at the levels I think we're going to see at the open so perhaps it wouldn't be any different.  

Here are my first thoughts while digesting this decision:

I won't make too many guesses about the future but it does seem like a rate hike by our Federal Reserve is now off the table in July and probably September.

Today's decline, if contained somewhere around where we open, where the futures indicate will put us only about four points lower than where we were a week ago on the S&P 500.  There had been a huge run-up into the vote these past few days.

There is a lot of speculation out there what will come of this decision.  Nobody knows. what the long term economic outcome will bring.   I repeat, nobody knows. what the long term economic outcome will bring.  Some time and distance needs to take place between the vote yesterday and possible  investment implications of the outcome.  

In that vein,  I  think the best thing today in terms of portfolio changes is to do nothing.  I am comfortable for the most part with cash positions for clients.    In terms of portfolio thoughts I will repeat part of what I posted yesterday, which was in response to a question put to me by a client about how much cash should be in their portfolio.  In this case my clients had heard from others in their office they should be 100% in cash based on the outcome of the British vote:

 "What I think investor should focus on instead is whether they have their investments structured in such a way that their risk profiles match up with their return expectations.  Somebody who for example cannot live with the market's volatility shouldn't expect stock market type returns from their investments and should think about having a much higher percentage of their assets in safer investments.  I understand that right now those safer investments like bonds or CDs don't yield a lot in terms of interest, but the higher longer term return potential of equities  might not be what that person can stomach.  On the other side somebody who has invested a larger percentage of their assets in equities {either by individual stocks, mutual funds or Exchange Traded Funds} will have to be more comfortable with higher volatility and understand that their investments can decline in value.  I think investors should be concerned about Brexit just like I think they should be concerned about our upcoming elections and the performance of the economy, but I think to be worried about what will come out of Europe in the next few days to the point of having 100% of assets in cash means that person should rethink their risk/reward profiles.  

Finally I will close with this.  There can be no question that yesterday's vote is perceived as negative for Europe, Great Britain and for globalization.  Only time will prove if that assumption is correct.  At the end of the day Europe and Britain will have to learn how to co-exist and how to trade with each other.  The sun will still come up in the east tomorrow and the day after that.  Here at home companies that trade overseas could see some fallout from this event.  Again though it is too soon to tell how they will be affected.  However, what happened in Great Britain yesterday should have little to no impact on how many hamburgers are sold in the US, whether or not somebody decides to buy a house this weekend or how many folks are going to set out on vacation for the 4th of July holiday.  In short life will go on financially, economically and personally.

Will have some more ideas on this Monday.

P.S. {Added after the open}.

So far markets have held after their opens.  This may have something to do with a rebalancing of the various indices by Russell FTSE.  That may be muting some of today's price action.  One last thing occurred to me is we now need to watch whether this week marked a potential high in the markets for the summer.  We now have political events of our own we'll need to pay attention to.  Both Republican and Democratic conventions are going to be held in July and there could be some fireworks around that.  Markets were overbought prior to last night by our work so that may have added to today's decline as well.

*Long ETFs related to the S&P 500 in client and personal accounts, although positions can change at any time.