“Teddy Bear” Market Closer to End Than Beginning — Brexit, the Fed & the Election

 In Quarterly Update, Strategy Updates

The recent news of Britain voting to leave the European Union – “Brexit” – has once again caused financial market volatility.  As we have previously suggested, this important event along with Fed Policy and the upcoming election are key data points that global equity markets must digest before stocks can get on “better footing” and a new bull market can begin.  Though Brexit will likely have dire consequences for certain parts of the European economy – particularly in Britain in the short term – it is unlikely to cause a global recession.  However, Brexit does have an influence on our other two data points – the upcoming election and Fed Policy. How these events unfold will likely shape the course of stock and bond prices in coming months.

The exodus of Britain from the EU can be managed by investors that choose to be active, yours truly, rather than passive.  As you know, we have been significantly underweight European stocks for more than a year – thankfully so in recent days.  This historic change in European politics and the disruption it has caused in financial markets will likely keep the Federal Reserve’s plans to raise interest rates this year on hold.  This Fed policy change is a “silver lining” for stock market investors who can focus their attention on the stronger markets of the world.  A continued lower rate environment will be good news for economic growth, corporate profits and stocks prices.  Is this enough to start a new bull market in stocks?  Not quite.

Election years are historically difficult for stocks, as this year has proven.  However, as the election progresses, investors will begin to get a better idea of who might win which, in turn, will have an effect on stock prices.  The recent political upheaval in Europe could influence our election here in the States.  Over the next few weeks and months, US citizens may witness in Europe the downside of a major change in political agenda and scale back their interest in a Trump presidency in favor of Clinton.  Recent polls suggest she is in the lead but we are uncertain if it directly relates to Brexit.  One thing we do know is that investors like predictability and, once there is a front runner of significance, market participants will regain confidence and global stock markets will likely get on better footing.  We are just not there yet, but will be in a number of months.

As we wrote in our last Strategy Update, there have already been bear markets in many sectors of the market – which we thankfully avoided.  However, in many of these areas such as energy, materials, and technology, there are companies selling at very reasonable prices.  We have made a great list of these great companies for your portfolio and, over the next weeks and months, we will look for opportunities to add these to your portfolio in anticipation of a new global bull market in stocks.

In the meantime, our mix of great companies in strong sectors appears to be weathering the recent storm much better than an investor who simply buys index funds – this is the value of our active management style. It is possible that stock markets may have to go lower before we get back on track however your portfolio is prepared for such a move.  In the event that markets turn down more significantly, we will manage this risk through your portfolio’s asset allocation, sector management and the use of carefully placed stop loss orders – our Active Risk Management Process.

We hope you find this information helpful.  If you have any questions or have experienced a significant change in your financial condition, please let us know. As always, thank you for your vote of confidence in our work. Happy Fourth of July!

Sincerely,

Your Team at Main Street Research