Jun 27, 2016 Brexit

Last week the United Kingdom (UK) voted to leave the European Union (EU), leading to Prime Minister David Cameron’s resignation and swift reactions in the financial markets. As a result of the political uncertainty, stocks, bonds and currencies reacted strongly. Financial markets had priced in the UK staying in the EU, so the vote took investors by surprise and added to the strong price movements. European equities, as measured by the Stoxx Europe 600 Index[1], fell over 6%. U.S. stocks didn’t get hit as hard, falling over 3%, as measured by the S&P 500[2]. Currency was particularly impacted. At one point, the British pound was down over 10% relative to the U.S. dollar. On the other hand, safe haven assets, like treasury bonds and gold, were up strongly on the day.

This is going to start a 2-3 year process of negotiations as the UK figures out how to re-establish trade with Europe. The UK will continue to exist under EU law throughout the withdrawal process. The longer term implications are still unclear but the precedent set by the Brexit vote may compel other EU members to withdrawal.

From an economic standpoint, the overall uncertainty of the new political landscape may act as a short term headwind to growth in Europe. However, economies and businesses are resilient. UK companies will adapt to life outside of the EU and continue to seek profits, produce goods and employ people.

In a global economy, there are always ripples throughout the world. These short term swings trigger big emotion. We are not experts on the UK economy and despite what the TV is telling us, neither are most of the people on the news. We have a process that keeps accounts diversified and invested with an emphasis on the long term. We will be reviewing allocation risks given these changes.

[1] The STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. It cannot be invested into directly.

[2] The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

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