Broker Check

Brexit, Elections, and Oil – Oh My!

September 14, 2016

We are certainly living in interesting times. Let’s very briefly explore some of the topics that have caused market anxiety this year.

BREXIT (that is, Great Britain leaving the European Union, or EU) was something that most of the financial gurus assumed would not happen. They were wrong. The EU was originally formed as an economic union to compete with the U.S., China, Japan and any other large economic power at that time. The EU currency is the Euro. Well, GB never gave up the pound sterling for the Euro, but they did join the EU. However, when the Brits felt that there were too many social and other non-economic decisions being made for them by the EU, most recently the immigration issue, they had had enough. One of the better columns I have read about this was written by Nick Murray (see our Client’s Corner last month entitled God Bless the Brits). I suggest that you read it when you get a chance. The real question is: Why did the market react so violently to the BREXIT vote, which in my opinion was a non-event? I believe that it is because the experts were surprised. As many have pointed out, nothing really has changed in the immediate future as a result of the vote. However, the market likes predictability, and the popular opinion was that the people of Britain would stay in the EU. The market had a two day tantrum, and recently came back to record highs. The pre-BREXIT hype only allowed some wily investors to buy into a down market. Cooler heads prevailed. Crisis averted.

It is common in an election year in the U.S. for the markets to be volatile. This is because we don’t usually know which party will be in charge in the end, or what they will do once they win. At the opening of 2016, January and most of February were ugly. But, as noted above, the markets recently hit record highs. I honestly cannot say what will happen in the remainder of the year, but I do expect there to be more volatility in the markets, and more volatility in the campaign rhetoric. Although I am not thrilled with our choices, I do have a strong opinion about which candidate I think will be better for our economy; but you may already know that.

Speaking of the economy, the decline of oil prices has been an unwelcome surprise (with the exception of commuters). Why is this happening? To summarize, more energy supply was created by improved mining techniques, and very slow economic activity reduced the demand for energy. Based on conversations with business clients, the consensus is that over-regulation is discouraging hiring and expansion; and the general anti-business climate currently in Washington creates a lack of confidence to take risks. Businesses create jobs. More jobs equal more spending. More spending equals wealth creation and more jobs. It would be a good start to loosen the regulatory environment and love business again. This worked for Reagan and Kennedy, so why not for President X?

Stick to your plan. Don't get emotionally involved in the headlines of the day. While past performance is no guarantee of future results, historically markets have always rebounded eventually.

by Ronald Donato, Jr., CFP®, MBA
Director of Financial Services