Friday, June 24, 2016

Brexit Update--It is NOT 2008!

This is not 2008.

After the remarkable “recovery” of markets since the lows in February (Dow hit a low of 15,660) I warned that a Dow of 18,000 in April and early June was perhaps an overshoot to the upside and markets were a bit overpriced.  

Add to this an unwarranted smugness about the expected outcome being “Remain” on the part of the Press and many Wall Street Traders, one should certainly have expected a substantial downturn with the “surprise” result of “Leave”.

Often markets get caught up in an improper reliance on “myths” that are assumptions that are not based on fact. There is no doubt that Free/Fair Global Trade is a benefit to the entire world.  However, unfair Global Trade is harmful to some and beneficial to others.
Free/Fair Global Trade is not the same as Globalization. The myth that people will be better off if all “borders” are removed was shattered by Brexit.  A great number of people reject this myth. They do not want unrestricted immigration. They want Free/Fair Global Trade based on value for value reciprocal benefits.

People also do not want their societies devastated by unemployment and falling living standards. Some also do not want their proud cultures diminished by excess immigration that chooses not to assimilate. Immigration used to be people coming to assimilate. Today, there is a sense that immigrants are coming to “take over”. This will continue to lead to political strife.

People can love their neighbors and even love their enemies—but that is not the same as inviting neighbors and enemies to come live in and redecorate their homes. It is no surprise that the proud cultures of the US and Great Britain are some of the first places to show organized resistance to a direction toward extreme diversity.

Nothing in Brexit necessarily will reduce Free/Fair Global Trade. Nothing that I can see in the upcoming US election will reduce Free/Fair Global Trade. (One candidate has warned he intends to focus on increasing the “Fair” part along with the “Free” part, but neither candidate is advocating a restriction in Global Trade.)

Hence, the only thing happening today, as the Dow 30 is down 3% is a reaction to the surprise of the result, and concerns about uncertainty of what happens next. Even at the level of 17480 for the Dow 30 as I write this at 1:30PM on 06/24/2016, the market is still UP 11% since February.

Could stock markets fall further? Could they reach the February lows again? Perhaps, but Brexit will not be the only cause. Stock markets are driven by Corporate Profits and Interest Rates. And, investors should not be invested in “markets” but rather a conservative balanced and diversified portfolio of ownership in great companies.

Be cautiously optimistic. Lower prices will create some opportunities. There are a substantial number of great companies with great future prospects—they will prosper even if Great Britain and a few other countries decide to defend their proud cultures by separating politically from the European Union

1 comment:

Joel Sears said...

Sound advice as always, Wayne. Thank you.