Wall Street saw its worst day in 10 months as investors appeared caught off guard by Britain’s vote to leave the European Union on Thursday. For the week, the Dow fell 1.55 percent to close at 17,399.86. The S&P lost 1.62 percent to finish at 2,037.30, and the NASDAQ dropped 1.92 percent, to end the week at 4,707.98.
Uncle Sam Spending –
During fiscal year 2015, mandatory spending by the U.S. government represented 68 percent of total outlays, while discretionary spending was 32 percent of the total. There is no annual spending cap on mandatory spending. Discretionary spending is capped by Congress each year (source: CBO, BTN Research).
Stocks and Bonds –
The size of the U.S. bond market (including treasury, municipal, corporate, mortgage and asset-backed debt) was $40.5 trillion as of March 31, 2016, 71 percent larger than the $23.7 trillion U.S. stock market as of the same date (source: Securities Industry and Financial Markets Association, Wilshire, BTN Research).
Is This the New Norm? -
Over the 25 years from 1991-2015, the average yield on the 10-year Treasury note was 4.7 percent. As of the close of trading on Friday, June 17, the yield on the 10-year Treasury note was 1.62 percent (source: Treasury Department, BTN Research).
WEEKLY FOCUS – Market Volatility Following Britain's Vote to Exit EU
Despite polls predicting British citizens would vote to remain in the European Union this past Thursday, they voted to end 43 years of EU membership by a narrow margin of 52 to 48 percent.1 Wall Street’s immediate, negative reaction to this historic event wasn’t surprising. Investors typically don’t respond favorably to significant change or uncertainty.
While the long-term effects of the vote remain to be seen, an article in Friday’s New York Times said few expect Britain’s departure to set off a long-term financial crisis like the one that began when investment banking giant Lehman Brothers collapsed in 2008.2 The United Kingdom is still part of the EU. It has two years to negotiate the terms of its exit from the time it notifies the EU it intends to leave. If Britain strongly disapproves of the deal, it could seek a second vote about leaving and potentially reverse its decision. If the deal stands, trade and financial agreements would likely be phased out rather than terminated.
Britain may face a recession. But the effect of such a decline on other nations is difficult to predict. Although Britain’s economy is ranked fifth globally, it accounts for less than 4 percent of total global GDP.3 The impact on international corporations also remains to be seen. To discourage such departures, Continental Europe is warning of ramifications on British exports. But it should be noted Continental companies will still want to trade with Britain’s large, wealthy market.
The referendum’s outcome may reflect a populist movement toward more protectionism and less global integration. How Britain fares in the coming months and years may influence whether this movement grows. On the flip side, Scotland’s leaders have warned of a potential renewed bid for independence so it can remain with the EU.
When the markets react emotionally, it’s imperative to think rationally. It may be a good time to review your portfolio, assess your current situation and evaluate your risk level. As always, I am monitoring the market conditions. Please feel free to contact me if you have concerns you want to discuss.
1USA Today, June 24, 2016, www.usatoday.com/story/news/world/2016/06/24/britainvotesleaveeuropeanunion/86324662/
2The New York Times, June 23, 2016, www.nytimes.com/2016/06/25/business/international/brexit-financial-economic-impact-leave.html?_r=1
3The Economist, June 24, 2016, www.economist.com/news/finance-and-economics/21701292-uncertainty-abounds-expect-global-chilling-effect-investment-why-brexit
In light of the Brexit vote, the article originally scheduled, “Protecting Aging Parents from Fraud,” has been rescheduled to run next week.
The Dorion-Gray Team
Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. a Registered Investment Advisory Firm. Dorion-Gray Retirement Planning is a trade name of Dorion-Gray Financial Services, Inc. located at 2602 IL Route 176, Crystal Lake, IL 60014. Dorion-Gray and the Securities America companies are separate, unaffiliated entities.
Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.
© 2013. Dorion-Gray Financial Services, Inc.