To be sure, this was a momentous surprise – but not a catastrophic shock like the Lehman Brothers collapse or the 2008 crisis. This is a political surprise, not economic. While it does increase uncertainty, for the next couple of years, it doesn’t change much else.

It’s currently expected that a Brexit will take two years to complete. Bearing that in mind, it is possible that things could change significantly as we move forward. The vote was close enough that there will likely be a recount or possibly another vote between now and the final exit date.

Here are several points to keep in mind:

    1. While the media is “having a field day” over this, as of the time of this writing, the market sell-off has only brought the value of the S&P 500 back to about where it was a month ago.
    2. This is not a “Lehman” event or 2008 in repeat; those were financial events with distinctive underlying causes. The Brexit is a political event with economic implications. In spite of the uncertainty, investors must maintain perspective.
    3. Brexit will put the Federal Reserve on hold for now, if not indefinitely (in fact, bond markets now reflect about a 20% chance of a rate CUT at the December meeting). Although this will not prevent the dollar from moving higher, this is a positive for the U.S. economy. Also, it should provide support to risk assets.
    4. While a partial recovery in risk asset prices may occur over the course of the next few weeks, equities may struggle to mount a sustainable rally, simply based on valuation. That being said, we currently are not anticipating a bear market in stocks.
    5. At this time, 60% of S&P companies yield more than the 10-year Treasury which only yields 1.56% as of Friday. Assets can remain overpriced and underpriced for protracted periods, but relative valuations matter.
    6. Clearly, the U.K. vote to exit the E.U. is a blow to the cause of European integration. There are fears that other E.U. countries may be follow suit, however we don’t think there will be others. While globalization has been good for corporate profits and investors’ net worth, it has largely been at the expense of the middle class worker and that population isn’t happy. Brexit is simply another example of this broad discontent among the working class.
    7. The impact on the U.S. economy should the U.K. fall into recession is probably very minor: trade between the two represents just 0.5% of U.S. GDP.

The outlook for European equities is uncertain, but our sense is that the lagged effects from the easing in bank lending standards over the past few years, along with a weaker Euro and lower energy prices, will be enough to keep growth reasonably elevated for the next few quarters. European stocks in fact, continue to sell at a meaningful discount to fair relative value compared with U.S. stocks. Eurozone stocks are also cheap at 13X estimated earnings and a dividend yield over 4%, which is about double the yield on the S&P 500 (iShares Eurozone Equity ETF).

The coming days are likely to be volatile and worrying to some. But there are always two sides to every story – remember that volatility can be a friend to the experienced investor. We are re-evaluating our portfolio in anticipation of opportunities. We think that a year or two from now investors will look back and realize Brexit was not a transformative event, but rather a short-term shock that created investment opportunities.

As always, we monitor market and economic events continually to determine the best course of actions for our client portfolios based on their respective risk levels. From time to time, we will reach out to you to reaffirm your goals, objectives and risk tolerance. Please reach out to your Atlas Advisor if for any reason you have changes that may be pertinent to our management of your portfolio.

This has been provided by Atlas Private Wealth Management for general informational purposes only.

Atlas believes the information on this site, including, but not limited to, market or other financial information is correct and reliable, but does not warrant that information contained on this site will be timely, accurate, uninterrupted or error–free.

As such, this information is provided “AS IS” for reference and is neither an endorsement of any security nor an offer to provide any investment advice. Further, the information associated with this email is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Any hyperlinks are provided as a convenience and we disclaim any responsibility for information, services, or products found on web sites linked hereto. By clicking on an advertisement or hyperlink, you are accessing material prepared by a third party content provider.

ALL INFORMATION AND CONTENT IS FURNISHED WITHOUT ANY IMPLIED OR EXPRESS WARRANTIES. ALL INFORMATION AND CONTENT ON THIS WEBSITE IS SUBJECT TO APPLICABLE STATUTES AND REGULATIONS.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including loss of principal.

You may also like