June 24, 2016

Stocks fell today in response to the Brexit referendum result as 52% of voters called for separation of the UK from the European Union. The news initially rattled the stock, currency, and bond markets as volatility spiked and investors embarked on a ‘flight to safety,’ seeking to reduce risk while they assessed the damage. The panic, however, has gradually subsided as stock prices in the U.S. remain steady after inching higher from the lows seen at today’s open.

The Dow Jones is down 563 points while the S&P lost 70 points (approx. 3%). As demand for U.S. government surged overnight, U.S. Treasury yields on the 5-year fell to 1.094%. The 10-year dropped to 1.580%. Gold prices surged 4.61% to $1,321.30 per ounce. U.S. markets fared better than their European counterparts. The German DAX index shed 6.82% while the French CAC index dropped over 8%.

Investors did not take Britain’s decision to depart from the EU lightly. As the result was announced, the FTSE 100 Index fell as much as 8.7%, the most since 2008. In addition, the British pound dropped as much as 11%, bringing the currency to its weakest point since 1985, according to Bloomberg. Furthermore, S&P Global Ratings has signaled that the UK will lose its AAA credit rating. Hardest hit, however, were the European banks with Barclays’ stock currently down 20.66% and the Royal Bank of Scotland falling 24.17%.

The nervousness is focused on two central issues. On one hand, there are doubts as to the future prospects of the UK as it may become isolated from the other 27 EU member countries. With the UK positioned as a principal capital pipeline for Europe, there is uncertainty as to whether the country can maintain its current stature as a central financial hub. From the Union’s perspective, the EU will lose its second-biggest economy and one of its primary military powers.

On the other hand, there is the question of whether Britain’s exit from the EU will spark further departures from the Union.

With all of the volatility, it is important to keep the charts in perspective. While the days leading up to the vote prompted brisk moves to the upside in anticipation of a “Remain” vote, the current drop in the S&P 500 takes stock prices back to approximately the same levels we saw just last Thursday, on June 16th. Overall, the market returned last week’s gains which were attributable to an expected “Remain” vote.

In choosing the investments within our strategies, we have been primarily focused on U.S.-based stocks, many of which having limited exposure to Europe. Accordingly, while our portfolios are certainly not immune from the effects of the Brexit vote, they have been relatively insulated from the brunt of the resulting stock price and currency volatility.

Going forward, we will monitor the impact of the Brexit vote on corporate earnings as U.S companies prepare to release financials for the second quarter.

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