Investment Insights: The grass may be greener on the other side of Brexit

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Gray jigsaw puzzle pieces with a stray piece that has the British flag on it, with the EU logo underneath the puzzle.The surprise result of the British referendum to leave the European Union (E.U.) this June sent shockwaves through the markets, and some investors expected additional fallout down the road. It seems the opposite has been happening. Recent data from the U.K. Office for National Statistics showed the British economy grew by 0.7% in the second quarter and just above consensus expectations. This may suggest there wasn’t much of an initial shock to the economy; however, we have to keep in mind that the Bank of England was aggressively supportive in its policy post-Brexit, not to mention the U.K. government had not even initiated the process of leaving the union.

That changed this week as Theresa May and her cabinet announced the timing of Britain leaving the European Union – they will declare Article 50, the formal start to the process, at the end of the first quarter next year. The FTSE 100 Index, a gauge for stocks within the U.K., soared optimistically on the news and is up almost 4% in the last week through yesterday. While many argue whether the timing is beneficial, there are still few details on the future of commerce between Britain and the rest of the union. There is a lot that could happen.

Meanwhile, across the pond, the U.S. is having a similar experience as the economy grows just above trend; the Bureau of Economic Analysis’s final print showed a sluggish 1.4% growth rate during the second quarter. While the data was a bit disappointing, third quarter growth may show some promise. The Federal Reserve Bank of Atlanta’s GDPNow data forecasts 2.2% growth this quarter, and an improvement from the recent numbers would be welcome. Markets were fairly unfazed by the economic data as domestic investors were focused on central bank policy and the election. The S&P 500 Index has continued to float between negative and positive territory over the past week as investors attempt to digest updates from central banks in the U.S., Japan, and Europe.

Oil has also been a key mover in the markets, as the commodity gained 9% over the last week ending yesterday on an unofficial announcement that OPEC agreed to cut output. As we discussed last week, we remain dubious that OPEC will follow through, and we will remain skeptical until a concrete announcement is made at OPEC’s next formal meeting in November. Crude oil prices have already stemmed their climb in the past few days as news broke that Iran and Libya boosted production despite the announcement. Domestic crude prices remained just under $50 per barrel as of Tuesday.

Our strategies remain prudently positioned based on risks the Global Investment Management team sees in the current environment. We believe the most probable market scenario revolves around some volatility during the U.S. presidential election and a likely rate hike in December. A new concern for investors will be Janet Yellen’s comments this week on the possibility of expanding asset purchases to corporate bonds and stocks – did someone say “slippery slope”?

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

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