The Big Bad Brexit

Brexit

Late Thursday night it became apparent that, despite earlier polls, the British people had voted in favor of leaving the European Union (“The Brexit”).  Unfortunately, this has led many people, especially in the media, to fear the worst.  Although there is some justification in being alarmed, I always find it useful in situations like these to take a step back and first understand what is happening from a macro level and then decipher what that means for our future.

From a very high level, I see the Brexit decision as a continuation of the anti-globalization and anti-establishment movement that has been gaining steam in most of the western developed world.  This is evident in the fact that the vote in England was almost eerily split up between urban and more educated individuals (some might define as the establishment) who voted for “Bremain” and middle and working class individuals living in more rural areas voting for Brexit.  Not surprisingly, this latter group has been very concerned by the influx of immigrants into Britain, which they see as resulting from the European Union’s open border policies.  So what does this mean for us?

In the short term, this event will increase the perception of political and economic uncertainty.  In general, markets dislike uncertainty and that is one of the reasons that the markets reacted negatively to the unexpected result of the British vote.  From the political sphere, we are already seeing additional increases in uncertainty with British Prime Minister David Cameron signaling his resignation and the Scottish threatening to hold their own referendum to split from Britain and United Kingdom.  This does not necessarily mean the world is ending, however.  Great Britain is still a dominant economic force and will most likely be able to reinitiate trade agreements with Europe to ensure stability, which is in the best interest of every party involved.  From an economic standpoint, I don’t believe doom is coming either.  While we are in our seventh year of a United States bull market and market indicators are generally mixed, the US market is not about to enter into a full-fledged recession with characteristics of the financial crisis.  This is due to the fact that the balance sheets of corporations are relatively healthy, and the Federal Reserve under Janet Yellen is committed to trying to manage monetary policy in a manner that is likely to avoid a recession in the near-term. The low interest rate monetary policy pursued by the Federal Reserve continues to act as a tailwind for companies, who can borrow at extremely low costs of capital.

Finally, and arguably most importantly in the context of the “Brexit”, the US market as a whole will continue to be seen as the best house in a bad neighborhood. International markets, whether in China, Brazil, or elsewhere have been underperforming in our latest economic cycle.  This new European development will only increase this trend which will continue the flow of foreign capital into the “safety” of the US market.  This does not mean that we are immune to outside volatility and overall market malaise but it does tell us that we will not necessarily feel the brunt of any outside negative market impacts.  Currently, our view is that from a long-term perspective, Brexit will be viewed as an important event, but not one that in itself will lead to market catastrophe.  However, we will continue to monitor this and other market events as summer progresses.

Wishing you a safe and restful summer.

Susan McGlory Michel

 

Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, Glen Eagle Wealth, LLC and their clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary.