As last week progressed, traders became increasingly certain the United Kingdom (UK) was going to remain with the European Union (EU). Global stock markets posted gains in four of the five trading sessions prior to Thursday’s vote, gaining 4% during that time. After a close vote, 52% for Brexit 48% against, global equity markets declined 5% on Friday. The market behavior during the last 10 days is more akin to gambling than investing. Speculators who were betting the UK was going to remain with the EU were forced to reverse their bets after the results were posted.
Recent market activity is a good reminder that we are all in this together. Market participants include speculators, investors, institutions, and individuals. It takes both buyers and sellers to complete a trade and establish a market price. As investors, our primary focus is on the fundamental growth and sustainability of the organizations we invest in. In addition, as we mentioned last week the best predictor of future stock market returns is valuation. Speculators can and will continue to bet on the coin flips.
The majority of the impact the exit vote will likely remain regional. Some of the results were immediate: David Cameron, UK Prime Minister, announced his resignation and the British pound fell 10%. Much of the remaining consequences are far from certain. The UK will need a new Prime Minister, the actual Brexit is probable a couple of years off, inflation ought to rise and UK economic growth and trade will likely slow.
As of today, our position is unchanged. We believe the U.S. economy will continue to move forward at a gradual pace and financial markets will produce low but positive returns. The volatility we are seeing today is also consistent with our stated expectations. We will continue to invest gradually, consistently, and conservatively.
If you have questions on the above article, contact our Sioux City Wealth Management Team below.
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