On Friday, June 24, the day after the United Kingdom voted to leave the European Union, we sent out a client update via email. The theme of our alert was that the “leave” vote took world-wide investors by surprise and investors don’t like surprises. We also discussed the time frame of the UK’s exit from the EU, which is unlikely to happen for at least two years after Parliament votes to begin the process. That Parliamentary vote will not take place until this fall, at the earliest. Thus, the market will continue its ritualist dance of uncertainty.
In our opinion, the only thing the vote provided was a “heads up!” to the world. The volatility we have experienced over the last few days might have been much less dramatic if the ballot question had been phrased “Should the UK exit the EU in three to four years?” This might have eliminated some of the panic surrounding the idea of a sudden, drastic change.
While divorce negotiations are in progress, EU policies, procedures, and practices will remain just as they were before the vote. Many of the concerns UK voters expressed by their “leave” vote will still exist under current policies—these include worker migration, European Central Bank policies, and European Union trade agreements. Further, the remaining 27 members of the EU have indicated that several policies regarding such matters as worker migration, which are in place now, must remain in place post-exit. The EU is communicating the message to any other county contemplating breaking away that the grass might not be greener on the other side.
As many of you know, Don and Lee have over 60 years of combined military experience, both on active duty and in the Army Reserves. In the military, as officers gain rank their focus shifts from small unit tactical decisions to making strategic-level decisions that could affect the manning, equipping, and training of the Army’s future force, perhaps as much as 20 to 30 years out. Strategic military decision making is always made in a volatile, uncertain, complex, and ambiguous (VUCA) environment. In the investment world, the VUCA environment exists today as well. In long-term investing and financial planning, we make certain assumptions and set goals regarding savings rates, return rates, inflation, and time horizons. Given our assumptions, we develop a portfolio allocation that gives us the best opportunity to reach long-term goals and objectives in accordance with individual risk tolerance and risk capacity.
The financial world exists in a VUCA environment that will continue to challenge investor’s confidence. Investors may begin to doubt their assumptions and tolerance for risk and become overly emotional. Further, hearing people such as financial journalists, or, more appropriately, financial “entertainers,” talk about how bad the markets are on any given day can lead one to make an inappropriate decision at an inappropriate time. But, the fact of the matter is that the markets are indeed volatile and it’s that same volatility that rewards investors in the long run.
No doubt the departure of the UK from the EU will have some financial, economic, and political ramifications in the US and Europe. Until financial and banking agreements are worked out, currency fluctuations with a strengthened dollar will cause US exports to be more expense to European buyers, thus inhibiting US exports to the EU. Until trade agreements are worked out, economic activity might experience additional friction in Europe and have a recessionary effect there. In the mean time in the US, the Fed’s hiking of rates seems unlikely, as does the Fed taking positive actions to stimulate the economy.
The bottom line is that the UK will exit the EU, albeit in about three years. And in those three years, investors should expect volatility related to Brexit and the ongoing negotiations. One can only imagine the blow-by-blow reporting and speculation the financial networks will engage in during this time. Regardless, the market will continue to move both up and down, whether a result of Brexit or not. Long-term investors may want to refine their planning assumptions, recertify their goals and objectives, and maintain a well-diversified asset allocation that is designed to weather market volatility in accordance to individual risk tolerance.
We look forward to continuing discussions and conversations with you regarding your financial plan, your goals and objectives, and your portfolio construction and allocation. As always, we appreciate your confidence and the trust you have in us.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.