Commentary
July 5, 2016
No one can say that the first half of 2016 has been boring. The first quarter started with U.S. markets dropping 15% before rebounding and many international markets performing even worse. Investors were concerned about the British exit (Brexit) from the European Union (EU). Chinese growth continued below expectations. Worry seemed to be the prevalent word as one tried to look forward.
Nonetheless, there is some good news. The U.S. economy continues to grow. The housing market has achieved the best numbers since the economic expansion and labor force growth has been slow but steady. Wage growth is still stagnant, but with an economy that has almost full employment, it is reasonable to expect that we will finally see growth in the earnings of the American worker. As consumers earn more, they will spend more, which should result in more normal growth levels for the economy. The second half of 2016 may look a bit better than the first half, but I expect volatility to continue.
Now, let’s address Brexit. A little more than a week has passed and I have had some time to reflect. To be clear, this was not a “Lehman moment” or similar to the Greek Crisis in 2011, where the fear was that Greece would collapse or leave the EU. Brexit had little to do with economics. It had a great deal to do with immigration. There was a feeling of powerlessness in Britain since they did not have total control over immigration policy. It is a political crisis that will be resolved through complex and difficult negotiations over the next two years. There is little doubt that foreign trade and investment will slow, triggering a recession in Britain. Nationalism is on the rise throughout the world and economic populism has gone so far that people seem to be willing to hurt themselves. You may think that surely people don’t vote to have a recession. Sometimes they do. Fear and emotion can sometimes trump expected consequences.
Markets don’t like uncertainty. Therefore, we can expect that we will live in an environment of elevated volatility for a while. The EU referendum in the U.K. and even the U.S. election reinforces the need to pay attention to populism and political risks in the coming years. For most investors, over time, the biggest risk to their portfolios is overreacting to events. There will always be a crisis somewhere in the world. Your portfolio was built with the expectation that markets will occasionally generate some short term noise. It is structured to ride out these events without putting your long-term goals at risk.
Enjoy your summer!
Ralph S. Margel, CPA, CFP®, AIF®
