Last week’s Brexit vote has cast a cloud of uncertainty over global markets. The decisions direct impact is largely a regional one but as new information arrives we are learning the outcome calls into question the entire European Union concept and that has rattled markets globally.
It is unfortunate timing. Stocks were starting to show some resilience after two brutal market declines in the last year, the IPO market was starting to warm again and international stocks rallied strongly into the vote. The vote may also turn out to be just what is needed to bring back vibrant economic growth.
The challenge for European Union members is the ability to sustain rich social programs in the face of stagnating incomes and productivity. We face similar problems here in the U.S. from local government pensions all the way up to Medicare and Social Security.
Central banks have been in the driver’s seat since 2008 and their policies have pushed asset prices to levels where fundamentals are stretched. Economic stimulus efforts to date have fallen short. New programs designed to inject liquidity directly into consumers’ pockets are likely under active discussion although Europe may find it difficult to implement new policy at a time when many factions have proposed new agendas. Central bankers no doubt have their work cut out.
At present the overall stock market environment contains far more negatives than positives. Technical characteristics of the market have deteriorated significantly and now suggests more declines may follow. It could also get worse if economic growth slows. There has been little evidence that U.S. corporate sales and earnings have started a recovery after one of the longest periods of contraction on record without a recession. Banks in Europe remain undercapitalized and slowing growth in China remains a concern.
Innovation and market expansion is alive and well and we can expect a more robust economic environment to return eventually. The task at hand is to determine how much of an interruption to the global economy the Brexit saga likely to cause before we finally exit the malaise affecting this market.
Investment management has become more complex in the era of hyper-policy action lowering confidence intervals for decisions. We have had a long market run, a mediocre economic recovery and a very long list of problems yet to be solved. The likelihood of the market taking matters into its own hand and again serving up a steep correction has risen significantly.
A couple years from now we may look back on this event as a small blip in market history. The innovation and market expansion on the horizon may need to take a pause as excesses are removed and reforms implemented. While investing is a long-term pursuit there may be times where playing some defense pays off. This may be one of those times.
