The Brexit vote (Britain's decision to leave the European Union) was unexpected by experts. Here are a few key points surrounding this historic event:
- Most politicians and businesses campaigned to keep Britain in the EU.
- Polls leading up to the vote, while close, predicted Britain would remain in the EU. Voters decided by a 52% to 48% margin to leave.
- The vote to leave the EU is non-binding on the UK government. Prime Minister David Cameron resigned and it is expected the next Prime Minister will honor the voters' wishes.
- Britain must now invoke a clause in the EU treaty to begin the process of leaving.
- Since Britain is the first country to leave the EU, many procedures have not been tested.
- The process of leaving the EU is expected to take several years since various levels of negotiation will be required. Uncertainty will abound until negotiations are complete.
- Britain leaving the EU is another indication of voters who are unhappy with the status quo. Britain, like the US, is dealing with a number of economic issues. Other countries may consider a departure. This speculation can hinder economic investment and trade which in turn can create headwinds for global growth. How this unfolds is unknowable but we are positioned to weather it.
Unpredictable events cannot be foreseen. What is interesting and reassuring is that shocks have happened to the market numerous times in the past. Below you will see three such major shocks in recent history and what happened following each event.
||First Day Decline
||Time to Recover Losses
|Japan earthquake 3/11/11
|US debt ceiling debacle 8/1/11
|European debt crisis 3/27/12
Source: Charles Schwab, Bloomberg data as of 6/23/16. Past performance is no guarantee of future results.
Since stock markets had not expected Brexit, short term uncertainty will continue to produce volatility, particularly in the European markets. The long term implications are also uncertain. It may take the next couple of years for Britain and the EU to work out new trade agreements.
We maintain a diversified portfolio to deal with events just like this. While we have international stocks in our portfolios, they currently consist of less than 25% of total stock exposure (although each client portfolio can vary from this amount). This means if your target portfolio allocation is 50% stocks and 50% bonds, you have approximately 12.5% in international stocks. We also hold significant portions of bonds and short term obligations to cushion your account on volatile days. The major market trend is still up, even after Friday's news, but we will be watching for a change in that trend and make adjustments accordingly.
What happens during a market cycle is always different but long term results are quite predictable - recovery for the disciplined investor and losses for those driven by emotions.
If you would like further information, please contact WealthCare Advisors, an MSMS Practice Solutions partner, at 248/971-7509; email@example.com; or, wealthcareadvisors.com.