On Brexit
What a tumultuous 5 days.
The lurching feeling is all the more acute after a period of one-way markets (up) and declining volatility. With polls shifting towards “Remain” last week, the prospect of all-time highs in the S&P 500 held an aura of inevitability. The unexpected Brexit vote, by a solid 4 point margin, tanked stocks for two consecutive sessions, eliminated Fed rate hike expectations for 2016, and catapulted gold. Monday’s continuation of trend points to Brexit being something larger than a one-off event catching market participants all on one side of a trade. The shock to the construct of the EU will impact financial markets through the end of the current cycle, which is already in late stages (7-years old). Perhaps, Brexit will be a tipping point, or the first of several events leading to a bear market and/or recessionary conditions.
The list of related concerns is lengthy:
- Valuations high into Brexit – approaching cycle peaks (18x for the S&P 500)
- Earnings expectations for the S&P will be reset convincingly lower based on stress to the financial sector and persistent currency drags on multinationals
- The strong USD could cause knock-on problems for the price of oil/energy and EM
- EU politics is a much bigger global economy risk without a “quick-fix” as was the case with Greece (Greece could be “fixed” instantly by remaining in the EU)
To make matters worse, the Three Lions went down, in spectacular fashion, to Iceland, population 323,002, in the knock-out stages of the Euro Cup. The world, and the bull market, are upside down!
