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Brexit. ‘Ain’t Happening….did happen

Brouwer & JanachowskiJune 24, 2016

In one line: A stunning result but don't overreact

Well, we called the Brexit wrong. Last night we sent out a note around 2.00am UK time. Early results pointed to “Remain”. Sterling rallied and our “Fear” index (a Yen and Gold indicator) fell. All good.

Within hours the results reversed and “Risk off” was in full throw. This morning we saw Sterling fall. It’s now 30% down from when the Exit referendum was announced. Stocks fell pretty much worldwide with Europe down the most. Treasuries, the go-to haven, rallied. This is what it looks like.

blog jun 24 all markets_SP50-USA

 

Only the U.S. & the UK are positive year to date. The UK rallied only because it was oversold and the market is heavily exposed to overseas earnings. Any fall in Sterling gives a short-term bounce.

We’ll leave others to opine on the wisdom of an exit. But this is what is means to investments:

  1. A stronger dollar: for now Sterling is a one-way trade. International markets will stabilize and probably rally soon. But for a U.S. investor, unhedged returns will be soft.
  1. Interest Rates: Chair Yellen mentioned the Brexit risk this week in her testimony, it’s highly likely the Fed will not touch the rate button. This means Treasuries will do well. As will Real Estate.
  1. U.S. economy: is large enough to withstand the stock market correction and insufficiently exposed to the UK economy to make any dent in U.S. growth. Hiring intentions nearly always fall if there’s a large stock market correction, as they did in the first two months of the year. So, we’ll watch for that.
  1. Europe: what has happened is unprecedented. Europe, in the shape of France and Germany driving most policy, will struggle with confidence, business intentions and similar pressures from their electorates. The ECB will do all it can to maintain confidence so expect low/negative rates to continue.
  1. Central Banks: will mitigate the downside. The ECB, Fed and Bank of Japan issued almost identical press releases committing to provide liquidity, FX support and swap lines. Again, we’ll let the dust settle but it’s good to see coordinated action.

So our actions are:

  1. Treasuries and Bonds: We’re very comfortable with our Treasury and bond investments.
  1. U.S. stocks: we don't think the S&P 500 correction will fall beyond 2000. It's at 2046 now and the 200-day moving average is 2020. There is support there.
  1. U.S. Small Cap: we would stay with our exposure and possibly increase. These stocks are exposed to the U.S. far more than their larger company counterparts.
  1. International: We’re less comfortable with our International exposure but we want to see how markets and companies react in the next few days. Most European market fell sharply but bounced off their lows. We need to clear out the shorts and the leveraged investors before moving.

 

Bottom Line: Now what we will not do is overreact. This changes our views but as a friend of mine recently said:

“Prices change more often than the facts – don’t confuse the two.”

We are still collecting facts.

Other:

Jeep manages to make a gear lever really complicated

Would you pass a financial stress test?

Blackrock wants you to wear jeans to work

Jury says “No Stairway” copy

 

--Christian Thwaites, Brouwer & Janachowski, LLC

 

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