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From The No-Load Fund Investor, 7/16...
Changing Times The first three weeks of June were sanguine for the financial markets, but the last part of the month was anything but. Most equities collapsed in the two days following “BREXIT,” the referendum in the U.K. to leave the European Union. However, equity markets rebounded beginning the Tuesday of the following week, as fears abated (at least temporarily) that the decision would result in massive economic upheaval and diminished corporate profits. (For Mark Salzinger’s views on the likely long-term effects of BREXIT on equity prices, see “BREXIT & Funds,” in the July issue of The No-Load Fund Investor.)
Despite the intermonth volatility, U.S. equities ended June about where they started. The S&P 500 posted a miniscule gain of 0.1%, while the small-cap Russell 2000 Index lost 0.2%. International stocks performed worse, as the MSCI EAFE Index of developed foreign markets fell 3.6%. For the year, the S&P 500 is up about 2.7% pre-dividends, vs. 1.4% for the Russell 2000 and a loss of 6.3% for the MSCI EAFE. Equally interesting, if not more so, is that from among these three indexes, only the S&P 500 is ahead over the past 12 months, with a gain of 1.7%, pre-dividends. The other two indexes are substantially lower, down 8.1% and 12.7% during the period.
Best Buys Commentary/Special Announcement. There are no changes this month in our recommended asset allocations or the specific recommendations within Best Buys. As to be expected in a year in which bonds are beating stocks and U.S. equities are beating foreign ones, our more conservative models are outpacing our more aggressive ones. Unless your own financial condition has changed, we suggest sticking with your current allocation, for now.
However, we are likely to make significant changes within some Best Buys models next month, when we will introduce some changes in the content and emphasis of the Investor itself.
BREXIT & Funds
On June 23, the United Kingdom (the UK) voted to leave the European Union (EU). This union, which began decades ago under a different name as primarily an economic amalgamation among a half dozen European countries, has in recent years grown to encompass 28 nations that addresses policies as diverse as climate, environment, health, security, justice and immigration.
Virtually worldwide, investors responded to the UK’s decision by the panic selling of equities. Exchange traded funds (ETFs) for the S&P 500, with declines during the period of about 5.3%, held up relatively well. Meanwhile, ETFs for the Russell 2000 index of small U.S. companies fell about 7.0%, broad emerging markets dropped 7.3%, the MSCI EAFE index of developed foreign stock markets sank more than 10% and Vanguard MSCI Europe ETF plummeted 13.6%.
Assets perceived as ‘safe havens’ were on the plus side during the two-day panic. U.S. Treasuries, government agency bonds, municipals, utility stocks and gold actually produced gains.
At first glance, it wouldn’t be unreasonable to wonder what all the fuss was about. A majority of the voters of one country wanted to separate from almost 30 other countries in an economic and political union, a process that will likely take about two years to complete. Sure, such a separation will be inconvenient in some respects. For instance, while non-Europeans could negotiate with the EU and cover virtually all major European countries on trade issues, security and other matters, but in short order they will have to negotiate with the U.K. separately. Also, within Europe itself, the relatively free flow of goods, services and people between the U.K and continental Europe will be replaced by something else, and such agreements could potentially have to be negotiated on a country by country basis. But, none of these issues on its own or in combination should cause world equity markets to drop 5%, 10% or even more in a matter of a couple of days.
So, something else must have concerned investors. We believe it was a perceived turning away from globalization by the voters in the U.K. Generally speaking, globalization has been great for corporate profits and equity prices. If, instead of an isolated event, BREXIT turns out to be the first tangible volley (as opposed to bluster from certain political figures) in a march away from relatively open trade, then it may auger ‘protectionist’ trade policies and all their potential defects, including higher costs and less demand.
For our full analysis of BREXIT’s potential impact, see the July issue of The No-Load Fund Investor.
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