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Mid-year thoughts and Brexit

I had planned on providing a mid-year update in the next few days, but due to the news overnight out of England I thought that I’d go ahead and put it out along with my thoughts of the news. One thing to remember – this is my opinion. It is being provided and written as generic information and doesn’t constitute any specific suggestions. Please remember to consider your own financial situation, goals and risk tolerance. Please feel free to call me to discuss any questions that you have.


Brexit –

What is it? – On June 23rd, 2016 the people of the United Kingdom voted in a referendum to decide if they will remain in the European Union, which they have been a part of since they became the 9th member on 1 January 1973. While the polls indicated that most people wanted to stay, the results surprised many, including the markets. Over 17.4 million voters wanted to sever ties with the now 28-member global governmental organization compared to 16.1 million who voted to stay.

Why does it matter? – The truth is that no one really knows what will happen as Great Britain leaves the EU. There are concerns that other countries will retaliate by imposing trade restrictions and that citizens of other countries may want to also vote to leave the Union. I think that the fears are more about the unknown. Markets don’t like unknowns. Business leaders can adjust to things that they see coming down the road, but when they’re unsure of what tomorrow will bring, they tend to freeze all new ideas, innovations, and advancements. Think of a sailboat – you can actually sail into the wind, as long as it is in a steady direction. When the wind is swirling, it is often best to lower your sail and wait it out until the wind steadies.

What should we do? – The first thing to do is not panic and over react. The world has seen events like this before, despite what the media will tell you. I would suggest not making any changes in your investments in the next few days unless this news somehow changes your own situation. Secondly, revaluate your own tolerance for risk and the risk in your investments.  Here is a link to risk assessment tool that will give you a risk score on a scale from 1 to 100. I can also analyze the risk in your portfolio on the same scale to see that it meets your own risk preference. Lastly, seek some help from someone who has navigated difficult times like this before.


The first half of the year –

US Stocks - The US stock markets were fairly volatile during the first half of 2016. They continued their fall that started in December, when the Federal Reserve raised interest rates, through January into February. In February, the heads of the global Central banks met and agreed to support each other on stimulative efforts for the global economy. This led to nice rally into the spring, nearly getting back to the May 2015 highs. Since April, the S&P 500 has fluctuated within a range of about 3 1/2% (source: Dow Jones). Believe it or not, this is pretty typical for stock markets. The times of steady gains or losses are historically the abnormal, although past performance is not indicative of future results.

International Stocks – European stock markets have been volatile in the first half of the year and were mostly mildly lower prior to the news out of England. Asian stocks have been down more due to concerns over China and their ability to transition to a consumer society from a producer society and the slowdown that seems to be coming, despite the governments best efforts to keep things growing.

Bonds – Interest rates have steadily declined despite the Federal Reserve’s raising of short term rates in December by 0.25% (source: US Treasury). The Japanese 10-year treasury bond actually went negative in February and the German 10-year Bund went negative last week. That means that investors are paying these governments to protect their money, rather than expecting their investment to earn interest. I have severe concerns about the long term stability of that! That just shows the level of concern that investors have of the near term economic futures in those countries.


The Presidential Election –

Oh boy! This has definitely been an interesting primary season. The voters have shown a disgust of the establishment. I think, based on the vote in England, this is not a US phenomenon. People are tired of the status quo, as it seems to be going nowhere – fast. I would not be surprised to see this continue into the general election in November. I think we will see a large number of incumbents defeated and a rise in the “citizen representative”. What will that mean for Washington? Who knows. It wouldn’t be the first time to see mass turnover on Capitol Hill. As a matter of fact, I think that our system was designed for times just as this. Whoever is elected will have a lot to deal with – $19 Trillion+ in debt, a massive bureaucratic machine that has become dramatically overly complex and unmanageable, an aging population more reliant on government programs such as Social Security and Medicare, and a partisanship that seems to be getting worse.  I will be voting for whoever I feel will be able to deal with our spending and debt issues the best (not that anyone can really deal with it, entirely).


What to expect for the rest of the year –

I wish I had a great answer to this. I do expect there to be continued volatility. With volatility, things can trend up, just as well as down. While many expect it to be a down year for the stock market due to the election year, 16 of the last 18 years have produced positive total returns for the S&P 500. The only two negative years since 1944 were 2000 and 2008 (both of which were at the end of 2 term presidents) (source: BTN research). 

If you are concerned, please give me a call so that we can sit down and talk about your personal financial situation and long term goals. That matters more than any given six-month period in time. It may be time to reevaluate things and assure that you have aligned your investments with your goals and tolerance.


On a personal note - we will be celebrated Sam Henry’s first birthday this weekend. It’s hard to believe that we now have a three-year-old and one-year-old ruling our house. I have definitely realized that raising children is a sport for young people, and we aren’t young. Nancy Lee and I have both celebrated our 40th birthday earlier this year. If you do the math, that means we will be paying for college for two children at a point that most people are thinking about retirement. I guess I better get my own financial plan in gear!


If you know anyone who is concerned about what the news will mean for them and their financial situation, please let me know. I’d love to talk with them.