Brexit

In the wake of the last month’s events, we feel the need to address the global situation(s), as well as, give our outlook moving forward. As many of you know, for weeks now we have been calling for recessionary pressures to fuel heightened volatility and market retractions in equities. As of the date of this writing (July 18, 2016) we are only a few weeks into the United Kingdom’s (UK) vote to leave the European Union (EU), commonly referred to as Brexit. Friday, on the brink of Brexit, global markets retracted heavily. Our goal here is to give our opinion on what we believe will happen moving forward as a result of Brexit.

The question we have encountered the most is “will the market crash?” Well, that is a relative question and answer. So the best we can say is, it depends. It depends on what your definition of a crash is, it depends on what happens next, it depends on how long you want to look at the market, and it depends on what market you are referring to.

Before the Brexit, we believed we were possibly on the brink of a multi-year market recession, in US equities. We have believed for some time now that the US has been artificially held up with via quantitative easing (QE) and historically low interest rates. Our economy has yet to top 3% GDP growth in the past 10 years (www.bls.gov), the first time ever in US history since being measured. We also believed the US has been heading into an earnings recession with higher real inflation than quoted by the Fed. This could possibly lead to stagflation. Further, we believed that this election period has been uglier and more unpredictable than any in recent history, and that the election could fuel uncertainty and fear. Uncertainly and fear, as you can imagine, are rarely good for the markets.

Lastly, we believed, and still believe, that markets are cyclical and that we are in the back-end of this bull market. Lastly, we constantly subscribe to a theory called reversion to the mean. Wikipedia defines this theory as a theory suggesting that prices and returns eventually move back toward the mean, or average. This mean or average can be the historical average of the price or return, or another relevant average such as the growth in the economy or the average return of an industry. This concept makes sense to most but we typically do not see it applied in their investment allocations. We have been in a bull market for 85 months now. Bull markets over the last 70 years have averaged 44 months in length (www.vanguard.com). Thus, we are flirting with double the average tenure in this current bull market.

Adding all of these factors, even if we are wrong and no recession happens, we don’t see a lot of upside in US equity markets. We also believe that the Euro currency could continue to fall versus the dollar due to the amount of spending within the European Union and the excess printing of Euro. Knowing that Greece was going to most likely need another bailout in a few weeks, we foresaw a falling Euro. As a result, we also see commodities doing very well over the next few years.

All of these outlooks were before the Brexit. As you can most likely deduct, we now feel more convicted that a bearish US equities market is on the horizon. We actually believe there is some strong international growth available, however, we must remind people that a sinking tide lowers all ships. In 2008, in our opinion, we should have learned how interconnected the global markets are now. This leads us to be very careful when looking at any equities right now.

The concerns surrounding the EU and the UK are not over. We could very likely see Scotland either leave the UK and go back to the EU, block the UKs Brexit vote (or attempt to), or even leave the UK and not join the EU. We could also see other countries within the EU decide to “jump ship” from the EU. As mentioned earlier, Greece is potentially going to have to have another infusion of capital to pay their debt coming due. The carryover of psychological effects surrounding the Brexit and subsequent EU Bond effects could also carry into U.S. investments as uncertainty could continue to rise. The ripple effect for global investments may be felt for decades.

Investment wise, we are not anticipating another 2008 hard and fast slide. Instead, we believe the next few years could look similar to the 2000-2002 bear market. Those years saw negative S&P500 returns of 10.14%, 13.04% and 23.37% respectfully (www.bloomberg.com). If we are right and the markets are in store for multi-year contractions, then we don’t want you effected negatively. There are ways to preserve assets and possibly grow assets in markets like these. There are too many investment options to discuss here, and several suitability factors to consider, but just know you have options and we want to visit with you regarding them.

The opinions voices in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Securities offered through LPL Financial, Member FINRA/SIPC.