Market Update: June 24, 2016

Markets around the world are reacting to the surprise outcome in the U.K. yesterday which approved the referendum to leave the European Union (aka the British Exit or “BREXIT”). The vote was expected to be very close and it was. The vote to leave gathered 51.9% of the total. As of this writing, the S&P 500 is down about 3%, giving back most of last week’s rise. The price of the 10-year Treasury has rallied strongly, demonstrating the power of diversification. Overseas equities are declining more than the S&P 500, European equities are down by about 8% and Emerging Markets are down about 5%.

From an investment perspective, we have three key messages for clients:
  • Dramatic events have occurred throughout the history of financial markets. After a quick knee jerk reaction, investors recalibrate their expectations.
  • Today’s market reaction is an excellent example of why we manage well-diversified portfolios. All assets in a portfolio are not affected by a particular development to the same degree.
  • A foundational role of fixed income is to provide ballast and stability in portfolios, even in a low yield environment. High quality bonds, including municipal bonds, are a very important part of a portfolio.
BREXIT is far from a done deal at this point. This vote represents the will of the people but now needs to be approved by Parliament to become official. We can’t project what action the Parliament may take as many members campaigned for ‘leave’; yet, it is unlikely Parliament will go against the will of the people. If Parliament decides to proceed, the U.K. will need to invoke Article 50 of the EU treaty to initiate negotiations to leave. The process will likely take two years or more. 

Britain has much more to lose than any other global player as a result of this vote. British press is saying today that the pro-remain camp did a very poor job laying out the various economic consequences of an exit. Press coverage of exit polls has suggested that this vote was intended to send a message to government and demand it take more control over the country’s economic and immigration policies. One possible intended consequence was to force out the controlling government of Prime Minister David Cameron, who favored to remain. In this, the BREXIT voters have succeeded. Cameron announced his intention to resign this morning, adding to the anxiety today in the global markets. Cameron was considered a good partner of the U.S. and America will miss his influence in the EU.

We also note that the Brexit is part of a wave of conservative nationalism in Europe, Scotland and the U.S. Those voting to leave the EU tend to be anti-establishment, anti-elitist conservatives. We expect this debate to continue in many parts of the globe and create additional volatility. The uncertainty of this unprecedented development is enough to send markets into an immediate tizzy and we may see much higher levels of volatility in the days and weeks to come. 

Patience, calm and continuing to adhere to an agreed portfolio strategy is most likely to be rewarded over the long-term. We will continue to provide further insights as the Brexit developments unfold. In the meantime, please reach out if you have questions or concerns.

First Republic Private Wealth Management encompasses First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”). FRIM, FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank. FRTC is a division of First Republic Bank. Investment advisory services are provided through FRIM. Securities brokerage services are provided through FRSC. Trust and fiduciary services are provided through FRTC and FRTC-DE.

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