Brexit, What’s next?
June 30th, 2016
The populist vote of the UK to leave the European Union sent the Dow down 610 points last Friday. As with most market sell offs, which start on a Friday, Monday’s carry over was fairly predictable as the Dow sold off another 260 plus points (-1.50%). Typically investors are given a chance to brood over their losses thru the weekend and continue taking some risk off the table the subsequent Monday, and that’s just what we got. Also, in somewhat text book fashion we had a legitimate “Turning Tuesday” (as strategist Jeffrey Saut will say) as the market shot back up which continued Wednesday and into today. This has a high chance of holding up if this is a run of the mill recovery, however in these times, anything is possible.
In an effort to address some of the concerns our clients may have, we elected to synopsize into two questions and answers:
What are the implications to the UK exit and what effect will it have on my investment accounts?
The psychological damage on Friday from the UK and European perspective was intense; the British Pound touched a 30 year low, European Bank stocks plunged 20%, and investors bought up Gold, and most U.S. fixed income investments. The U.S. stock market as measured by the S&P was down 3.4% and the DJIA was down 3.5%. Winners were diversified portfolios (which most of you own) and their respective fixed income exposure. In addition, short term muni funds, Treasury ETFs, and Intermediate Funds also performed extremely well. It was a perfect time to validate our client portfolio allocations, and we found several investment models run by one of our institutional managers actually went up in value!
Losses to the S&P500 were simply set back to where they were only several weeks ago. Bonds aren’t much different with some small appreciation as the 10 year Treasury dipped to 1.40% from 1.57% a week before (remember market value goes up when yield goes down).
Many of you know we have been patiently waiting for a spark to ignite a buying opportunity. Whether it was going to be the Brexit referendum, the Presidential election, ISIS, interest rate hikes by the fed, or some other myopic event, we felt something was going to trigger the market to take a breather.
Fundamentally speaking, that time is now. The trailing P/E ratio of the S&P500 is currently 23.34, which is only slightly different from where it landed on May 1st, 2016, at 23.87. On June 1st it reached 24.38, up from 22.01 in February, underlining the 10%+ market rally from the lows in the first quarter. Somewhere in between is a logical P/E ratio of the S&500 with which the market feels comfortable. We don’t believe the market is overvalued using this metric, however even with the sell off its tough to make the argument for an undervalued market. We seem to still be stuck in the sideways channeling motion of the last 2 years. With peaks and valleys like we’re experiencing we recommend active management and opportunistic investing versus passive or buy and hold strategies during the next 24 months.
U.S. based publicly traded companies generate approximately 70% of their revenues from here in the homeland. We believe the decision to leave the EU will be create some challenges for Great Britain but not the United States.
Was there, or is there still, a buying opportunity?
Yes, there was. Although we lean to an overall fairly valued market right now, right after the carnage it appeared just like with many panic stricken sell offs there was opportunity.
Most of our advisory models went up slightly or did a great job treading water due to the exposure of fixed income. That’s how diversification is supposed to work. When one position goes down in value, in theory other positions or asset classes should counter balance the negative.
For those of you who own our internally managed Ashworth Sullivan Target Return Objective (ASTRO) models, we took advantage of the sell off and put some sideline cash to work, and sold about 2-3% of some fixed income. New clients which are currently in the process of dollar cost averaging into a model with us or a 3rd party manager, we instructed the managers to put ½ the cash to work.
Depending on your particular investment objective and time horizon, now may still a good time to reduce small percentages of your overall fixed income allocation. It is probably a good time for you and your advisor to discuss the possibility of rebalancing. We think it is time to strengthen your equity positions in the US vs Global, and closely examine your holdings in UK and European Banks.
If you have cash and didn’t put it to work we would encourage you to have a discussion with your Financial Advisor about the benefits of a true advisory account, whereby a manager can deploy capital with standing authorization. The benefits are many, like taking the emotion out of investing and being able to expeditiously take advantage of pullbacks like we just had without having to make a phone call.
As always, we appreciate the chance to serve you and your family, and we value the trust you have placed with your advisor and our firm.
The Investment Committee