From The Desk of Terry Hill
Like many of you, my family and I had a wonderful time celebrating the Fourth of July holiday weekend. When I was growing up, the Fourth seemed mostly about barbeques, friends, hanging out at the pool, and fireworks. Through my adult years, however, I’ve come to better appreciate what Independence Day 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 president of the United States. 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. 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. 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 dollar begin to strengthen as global investors see the relative safety of the U.S. as a shelter from the stormy global environment? In some respects, the vote boiled down to economic uncertainty versus national sovereignty. 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, 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).
Moreover, the dollar’s recent stability reduces the drag on revenues from firms that do a significant amount of business overseas. When U.S. companies sell goods around the globe, they must translate those sales back into stronger dollars. A rising dollar is gift for Americans traveling overseas, but it puts a dent in the bottom line of multinationals.
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.
By itself, the UK’s economy won’t send the 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 U.S. economy and corporate profits. If you ever have questions or concerns, or just want to talk, my team and I are always available.
Final thoughts
While we do not know where the waves of populism that are swelling in the U.S. and Europe may take us, they represent the will of free citizens. Democratic freedoms enable the ordinary to do the extraordinary; to innovate, create wealth and fuel new economic growth. True, free elections aren’t always neat and tidy, but history strongly suggests they are a vital ingredient for long-term economic success. 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.