In a historic referendum vote on June 23, citizens in Britain chose to leave the European Union. British Prime Minister David Cameron announced he would resign and the political path forward is unknown. This disruption of the status quo is likely to linger and some political analysts say other member nations will also be emboldened to leave the European Union. Immigration policy ranks high among the reasons for leaving the EU. Europe is struggling to absorb (and employ) a large number of immigrants/refugees from the war torn Middle East.
The fear that more terrorism will be exported from ISIS through the immigrant population adds to the turmoil. These are the conditions that the US Presidential candidates face at our own political party conventions in July. As investors, we are well served to identify the place where politics and investing collide. Political uncertainty is alive and well both at home and abroad.
Knowing that stock markets dislike uncertainty, the sharp decline around the world is no surprise. Before the aforementioned referendum vote, the US stock market had come within 1% of the record high set in May of 2015. Now that global economic growth is more likely to decelerate, the Federal Reserve may further suspend the goal of normalizing interest rates. This translates to low yields and corresponding high prices in the bond market. The 10-year Treasury bond yields approximately 1.5% and cash yields almost zero. In this setting, a 2% dividend yield on stocks looks attractive, especially when it can be bought on sale.
Elevated stock market volatility is back, following sharp corrections in August of 2015 and again in January and early February of this year. Christine Benz (Director of personal finance at Morningstar) provided wisdom when she recently wrote:
Resist fight-or-flight response in wake of Brexit vote. Focus on your risk capacity, portfolio allocations, and tax position – not the noise.
At ASG, we always welcome your calls, texts, and emails. But nothing beats meeting with us in person. As we pass the mid-point of 2016, now is an excellent time to make an appointment to review your portfolio and your personal economy.
Asset Strategies Group, LLC / an Independent Investment Advisor Firm