By now you have all probably heard of the Brexit vote.  The UK decided to hold a referendum on whether or not to stay a member of the European Union.  The votes were cast, and the decision to “exit” the European Union was made.  Since the vote, markets globally have been extremely volatile, and I’ve seen articles with the wildest titles:  
“Why Brexit Crisis is a Screaming Buy for Stock Investors”
“Jim Rogers: Brexit Blowback “Worse Than Any Bear Market You’ve Ever Seen”

Notice how I highlighted the articles?  It made them scarier, didn’t it…

But that is not ALL!   Here are some other favorites: 
Cameron to Resign, Markets Tumble after Brexit Vote
Why the U.S. is freaked out about Brexit
‘Brexit’ in America: A Warning Shot Against Globalization
Experts: Markets to be volatile after Brexit bloodbath

All opinion pieces, I might add.  Ahem…

Let’s start with what is not an opinion.  Global Markets have come in (declined in value) since Brexit.  Some examples (6/27/16):
a.    The S&P 500 is now down on the year again at (2.08%) after being up 4.52%.  In context, the S&P was down over 10% in February this year.  We aren’t even at the lows of the year.
b.    The Russell 2000 (IWM) is now down on the year again – (3.49%).
c.    The ACWI (All Country World Index) is down (4.5%)
d.    The MSCI (EFA) is down (10.37%)
e.    Japan (EWJ) is down (6.93%)
f.    China (FXI) is down (8.25%)
g.    Emerging Markets (EEM) are up just slightly on the year at positive 0.12%. While they are down (4.81%) in the last 5 days.

These numbers are not great.  But “Bloodbath”; “Freaked Out”; “Crisis”; “Worse Than Any Bear Market?”  Wow.  No wonder the article on “Why so many Americans are feeling more stressed out” – CBS News – came up in my search.

So, let’s talk about what happens next:
Over the next few weeks we are going to track how this market reacts to Brexit.  Do I think Brexit is really the monster of the next horrible financial crisis?  No.  However, could Brexit focus investor’s attention back on fundamentals that are weak?  A struggling economic cycle in China?  Japan in the ditch?  Unemployment in many of the European Nations?  Revenue numbers here at home that are not growing?  The US Fed and interest rates?  Yup.  That could do it.

All of this is possible.  Could it then lead to the next recession and a (30%+) drop?  Sure.  It is possible.  Every 30% decline starts with a 5% drop.  Alternatively, could this all get cleared out again and markets fully recover in the coming weeks?  Sure.  That happened as recently as February of 2016 (yup…this year) when the S&P was down over 10% on the year, only to recover in March when oil stabilized.  Data changes every day, and as more information is made available it will affect tactical portfolio decisions.

One more thing, the S&P500 still trades 17.5x forward earnings that are not expected to grow. Further, the uncertainty in future earnings is due to this referendum and what this may mean for other countries in the EU. Is this a major inflection point in terms of globalization? November’s election is essentially a referendum against globalization. Markets will struggle to price what these risks mean for equities, however sticking to the facts, we know this is a relatively expensive market even at 2000 SPX for zero earnings growth. 15x multiple takes us back to 1750-1800 (about 10% down from current levels).  This may be the catalyst that turns this market negative (we have tried 6 times above 2100 SPX to break out, only to fail eventually).

Gainplan has viewed this market in a NEUTRAL context since March 24, 2016, meaning we view the volatility and RISK/REWARD scenarios to be extremely tight, where the market could break-out either up or down with equal possibility, and where sector rotation may be required as markets float between high and low trading bands, but not breaking out of them in either direction.  As my friend and Gainplan portfolio manager Dave likes to say – Long term planning/investment clients in Gainplan’s tactical models should be content with sitting in a large percentage of cash and expect more frequent trading until the indicators line up to create a more favorable longer term reward-to-risk environment.  

Oh, and when this is all over we have one of the strangest elections in America’s history coming up in November.  I wonder what the press will sensationalize for that!

Stay cool this Summer!

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