Brexit Vote Surprised the Markets

Despite recent polls indicating a tight race, the British vote to exit the European Union proved a significant negative surprise for markets at home and abroad. Foreign markets and currencies, in particular, experienced significant volatility as a result. The British Pound declined 8% vs. the Dollar. The “safe-haven” U.S. Dollar and Japanese Yen increased 2% and 4%, respectively. Major currencies rarely move this much in a year, let alone, a single day. International stock markets headed lower (especially in peripheral Europe, i.e. Spain and Italy were down 12+%). The U.S. equity markets fell 4% today, although they are just back to where they were a month ago.

Why are Markets Down?

We highlighted the British vote in our April Market Commentary as one of several reasons for holding some cash entering the second quarter. While the actual British exit from the European Union will take at least 18–24 months to negotiate, the uncertainty will weigh further on an already tepid global growth outlook. Reflecting that view are U.S. Fed Funds futures, which are now suggesting the Federal Reserve will keep rates lower for longer than previously anticipated. The ten-year and thirty-year Treasury notes reacted accordingly now yielding just 1.6% and 2.4%, respectively.

What Is the Course from Here?

From experience, we expect the heightened uncertainty to persist for weeks or months (not days). As discussed in previous communications, current valuations will cause us to move slowly with our excess cash. With that said, continued volatility over the coming days and weeks may present attractive opportunities to deploy cash or rebalance portfolios (i.e. sell assets that have become relatively expensive in exchange for buying those that are cheaper). Events like this reinforce the value of broad diversification and maintaining the appropriate risk exposure in portfolios.