The Brexit vote is now behind us, and I while I hope to never hear that word again, I have a feeling I’ll be haunted by its ghost. Already the Romanians have coined “Remainians” and the Dutch, “Nexit.” I think I might have preferred the term Gwyneth Paltrow used when she divorced: “conscious uncoupling.” With an eye to history, however, the English were the first to establish parliamentary democracy with the signing of the Magna Carta, and the first to overthrow a king, so I guess it’s not surprising they have become the center of the EU rebellion. All is not clear as to how this exit will work, but we can be pretty sure that market volatility will remain. That being said, markets tend to recover from shocks relatively quickly as you will see below.

Future Impact of Brexit

• Who is next? There could be other countries calling for their own referendums. This could put the European Central Bank in a position to continue its quantitative easing (buying of bonds to keep rates low).
• Britain has chosen a new prime minister to lead the country as it shifts out of the EU, but how exactly the exit will be negotiated remains to be seen.
• Investors will continue to look at the US as a safe haven which will strengthen the dollar. That strength could put pressure on commodity prices. The rising dollar along with Europe being China’s largest customer could put pressure on emerging markets.
• With all this, there is potential for a recession in Europe.

Domestic Stocks

US markets have recovered the Brexit pull back and we do not see a bear market in the near future. However, additional uncertainty with Brexit could keep the road bumpy. Job indicators are looking healthy and wages appear to be strengthening, which is good for our consumer based economy. The June employment report shows the US economy was on solid footing before the Brexit vote. With the uncertainty surrounding the vote, the Fed should remain on hold for a few more months. We see the low rate environment as supportive of the current market valuation.

Fixed Income
Interest rates across the US markets generally decreased during the quarter. The yield on the 5-year Treasury note fell 20 basis points (bps) to end at 1.01%. The yield on the 10-year T-note decreased 29 bps to 1.49%. The 30-year Treasury bond declined 31 bps to finish with a yield of 2.30%.

Looking at broad market indices, the US outperformed developed markets outside the US and emerging markets. US REITs recorded the highest returns, outperforming the broad equity market.

Looking Ahead
We do not see a recession on the horizon. That said, we believe all of the geopolitical issues will result in continued market volatility. As we look at allocating in the environment, we have begun to focus on high quality assets with strong cash flow. We have also begun to add more defensive positions. In this low yielding world, dividends look more and more attractive.

The quarter also marked the end of the NBA finals and the quants have broken down how we can all shoot like Steph Curry. It all comes down to angles. The rim is twice as wide as the ball but with horizontal movement, the ball becomes wider. So you need an angle, but not too steep. Turns out the ideal angle is 45 degrees. Below are a few angles that you won’t find on the evening news.

• Global trade has expanded as a proportion of GDP from 20% in 1995 to 30% in 2014, signaling greater global integration.
• The world’s biggest economy, the US, has been recovering (slowly) with unemployment halved in six years from 10% to 5%.
• Global oil prices, while up about 80% from January’s 13-year lows, are still 50% below where they were two years ago. While bad news for oil related companies/countries this is still good news for the consumer.

And, with summer at its peak and some of you still considering where you might go for a good vacation, consider Britain. The UK’s rejection of the EU may have caused the markets to tremble, but it has made the pound a better deal. So for what it’s worth, consider breakfast in London, thanks to the Brexit.
We thank you all for your continued support and look forward to speaking with you over the next couple of weeks. We should have your client portals set up shortly for you to download your reports. Our technology partner is updating the portal to make it easier for you to navigate.

If you call our office and hear a new voice, that is Vanessa Vigoren, our new Portfolio Administrator. We are very excited to have Vanessa on our team.

*Knackered is a term Britons use to describe their tiredness or exhaustion of a situation.

Disclosures

* Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2016, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2016 by Citigroup.

The S&P 500 Index is a free-float market capitalization weighted index of 500 of the largest US companies. This index is calculated on a total return basis with dividends reinvested and is not available for direct investment. Charts from Dimensional Fund Advisors. Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.

Disclosure

The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.