Voters in the UK surprised the world on June 23rd and voted to exit the European Union. Polling anticipated a “too close to call” result, but in the last days leading up to the vote sentiment seemed to favor “Remain”. The vote to “Leave” rocked global markets and the Dow shed 900 points in two days. Then as if to scoop up bargains, buyers rushed in and pushed the index back up making up most of the losses by the end of June. As June came to a close the Dow was up 8/10ths of 1% for the month in spite of all the gyrations in its 22 trading days.
It is obvious in the wake of this vote that it could take a couple of years for the UK to fully disengage from the EU. Exactly what this will look like for the UK and the future of the EU remains to be seen. It could be that the UK will ultimately benefit from taking back control and the European Union may see further fall out as other members consider their futures. In the meantime, this vote could impact global markets for a few years. The banking sector is particularly vulnerable as London is the headquarters for banking and finance for the entire European continent.
As stocks plummeted in the two days following the vote, U. S. Treasuries and gold increased in value. U.S. Treasuries and gold are considered to be safe places to put money when the stock market declines. Interestingly when the stock market rebounded, Treasuries and gold continued to trend upward. The underlying message appears to be that many investors are still wary of the uncertainty confronting the stock market even though there was enough buying to send the stock market back up close to 18,000 one more time.
As we have reported numerous times, one of the pressures on the stock market is the monetary policy. As expected the Federal Reserve declined to raise interest rates at the June meeting. It seems unlikely that an interest rate increase is coming this year. The Federal Reserve appears to have reversed its policy expressed last December to raise rates three more times in 2016. Given the lack of growth in our economy, declining corporate profits, and economic troubles around the world, an increase before the election seems unlikely.
And speaking of the election, the presidential campaign season is in high gear and that is also weighing on investors’ minds. The uncertainty around the outcome is likely to continue the volatility we have experienced for the last eighteen months.