As we write this on Monday afternoon, financial markets around the globe continue to retrench in the wake of the recent Brexit vote. The US stock market is down about 5.5% from last Thursday’s close, which is modest compared to plunging prices in other markets. London’s FTSE 250 is down 13.6% over the last two trading days, while the French benchmark is down 10.8%.
We certainly don’t have any unique insight on the causes or effects of the Brexit vote. It came as a shock to most, and the markets have reacted appropriately to the huge increase in uncertainty ushered in by the result. Many of the uncertainties are political, but there are real economic uncertainties as well. What will this mean for the financial system, for trade deals, for consumer confidence, for business capital spending? Nobody knows the answers to those questions, though it is pretty clear that this is a negative shock to the system that will dampen economic activity.
For investors, heightened uncertainty equals increased perceived risk, and that means falling stock prices (particularly for economically sensitive stocks) and rising high-quality bond prices (which are seen as safe havens).
While we at Clean Yield were just as surprised as anyone by the Brexit vote, we have been positioning our client portfolios for anticipated volatility this year out of concern that corporate profits have little room to grow, the stock market is expensive, and the odds of a recession are increasing. That has meant shifting from more economically cyclical sectors such as industrials and technology into more stable groups like health care and utilities. That positioning is already helping cushion our portfolios as the market declines. We continue to focus on quality as the investor’s best friend in the face of volatility. That is, companies that have steady earnings, robust margins, and healthy balance sheets are likely to be most resilient in uncertain times.
We expect volatility to remain elevated right through the presidential election in November, as the prospect of another shocking vote is likely to keep investors up at night until the result is certain.Tags: Brexit, portfolio performance, stock market