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August 18th, 2016

Brexit

A European political earthquake that’s felt at home

Like many of you, my family and I had a wonderful time celebrating the July 01 holiday weekend. When I was growing up, the first seemed mostly about barbeques, friends, hanging out at the pool, and fireworks.

Through my adult years, however, I’ve come to better appreciate what birth of Canada really means. We have a degree of freedom in our nation that few today and even fewer throughout recorded history have enjoyed. And that freedom came (and still comes) at a steep price.

We have the freedom to speak our mind, the freedom of religion, the freedom to assemble, and the freedom to question our government.

In addition, we have the freedom to choose our own leaders – from the local city council to the Prime Minister of Canada.

But I am also a realist and am painfully aware that many folks aren’t very enthusiastic about the choices that We the People have made.

It’s not always perfect, but if you really reflect on it, we, as a nation, govern ourselves. And this grand experiment in democracy has been exported around the world in many forms.

Political tremors create economic waves

This leads us to Europe–and the United Kingdom in particular. On June 23, the UK voted in a nonbinding referendum to exit the 28-nation economic and political bloc called the European Union. Though “Brexit” was chosen by a narrow margin, the people had spoken.

Given it’s a nonbinding referendum, British lawmakers could ignore the results.

While there has been some talk that a UK exit will never happen, at this juncture, it doesn’t seem likely the referendum will be ignored.

Nonetheless, a victory by the “Leave” camp wasn’t supposed to happen. While the vote was expected to be close, pollsters, analysts, and even the bookies who took bets all projected “Remain” would squeak through with a win. In advance of the vote, stocks rallied in anticipation “Leave” would go down to defeat.

Whether good or bad, continuity usually benefits markets because it provides certainty.

Recall from some of my past newsletters that markets hate heightened uncertainty. More accurately, short-term traders dislike added uncertainty and are much quicker to hit the sell button than longer term investors, who are more tolerant of disappointments.

Why might this be viewed as heightened uncertainty? Well, we’re in uncharted waters. No nation has ever asked to leave the EU.

Could Brexit fuel other separatist movements and create additional economic uncertainty in Europe? Might we see the euro currency, which is shared by 19 nations, begin to unravel?

How might this pressure an already fragile European banking system? And will the US dollar begin to strengthen as global investors see the relative safety of the U.S. as a shelter from the stormy global environment?

Brexit 101 – what’s it all about

In some respects, the vote boiled down to economic uncertainty versus national sovereignty.

You see, the EU is both an economic and political union. Member states enjoy the benefits of free trade, i.e., the free flow of goods and services across borders. Now that the UK appears poised to exit the EU, trade deals and the vast complexities of an exit must be negotiated.

Further, large companies that set up shop in London, using their address as a gateway into the EU, may find other host countries more beneficial. Simply put, layoffs and empty buildings dampen investment and consumer spending, which, at worst, can lead to a recession.

But membership has its costs, and nations in the EU sometimes find themselves burdened by the whims of the European Parliament.

Today, immigration is the biggest concerning facing UK voters, and member nations must accept anyone who is a citizen of the EU.

It’s this open-door immigration policy that has rubbed some folks the wrong way.

Many Brits dislike EU rules that require British taxpayers to finance welfare benefits to those who immigrate to the UK.

In a nutshell, what voters viewed as onerous regulations and their impact on national sovereignty trumped the economic uncertainty a Brexit might cause.

Let’s not discount the positives at home

Many of the themes that have kept stocks near highs continued to play out over the quarter that just ended. On the plus side, Canada and U.S. economic growth appears to have accelerated in Q2 and interest rates remain low. While Brexit may muddy the picture, earnings are forecast to begin rising again in Q3 (Thomson Reuters).

Meanwhile, the increase in oil prices has not only reduced the strong head winds in the troubled energy sector, but it has reversed the surge in yields among junk bonds.

What’s an investor to do?

Control what you can control – the investment plan – and be very careful about making a rash decision based on an emotional selloff. Stocks took a beating in the wake of the Brexit vote but quickly recovered nearly all of their losses by the end of June.

I understand that most investors don’t fully understand the impact of what just happened in Europe in relation to their investments. Honestly, many analysts would concede there are unknowns.

My goal, however, is to keep you focused on your financial goals and objectives.

Emotionally based decisions rarely work out in your favor.

Whether large or small, whether highly sophisticated or simply a novice, investors price stocks through their collective buy and sell decisions. When new information is disseminated in the marketplace, stocks may react either positively or negatively, depending on how the information is viewed.

By itself, the UK’s economy won’t send the Canada or U.S. economy into a recession.

But Brexit creates a new level of uncertainty and risk. However imperfectly, investors attempt to discount the event, pricing in how it may affect the Canada and the U.S. economy and corporate profits.

Bottom line is that this is just all noise and should be ignored. Enjoy the summer with your friends and family, as it is all too short in this beautiful country we live in.

If you ever have questions or concerns, or just want to talk, my team and I are always available.

I hope you’ve found this review to be educational and helpful. As I always emphasize, it is my job to assist you!

Thank you very much for the trust and confidence you’ve place in my team and my firm.

Neal Owen POSTED BY: IN Newsletters