The markets were taken by surprise this month when Great Britain unexpectedly voted to leave the European Union. The markets were running up in anticipation of a vote for the country to stay in the EU. So, when they voted to exit, it took investors by surprise and the markets fell almost 900 points in two trading sessions.
In reality, the “Brexit” will take almost two years to complete and we do not have much concrete information on how it will affect global economies. What we do know is that Great Britain is the conduit for import and export for most of the EU. Thus, the exit may have implications on Europe’s international trade.
That said, we really look at this exit in the same fashion as we first looked at Obamacare. Most investors didn’t really understand how Obamacare would impact healthcare, and ultimately the economy. However, as we now look back, healthcare stocks have done well since it was passed. We get the same feeling with the Brexit. Unfortunately, we don’t know how the exit will affect the global economies and will not know for many years to come, but we do not feel the exit warranted the markets abrupt negative reaction. Much like we have seen with other events over the years, investors tend to sell first and ask questions later.
Ultimately, we continue to believe the markets will trade higher over the long-term and, thus, feel like this market correction will create an opportunity if we are patient. We will look to use the volatility to our favor as we run through this cycle.
As we celebrate the 240th anniversary of our great country’s independence, we wish you and your loved ones a joyous and safe patriotic holiday.
The markets recently have traded toward the higher end of a two-year range, primarily following oil prices, as crude prices climbed back to $50 a barrel. This represents a full 80% climb from lows earlier in the year. In reality, the markets are just range bound and have been in this range for almost thirty months.
Although a sideways market is like watching paint dry, there are positives that come with this type of market:
Essentially, the markets are correcting sideways. It’s been a wide range, but we would certainly prefer this kind of market action to a bear market. Market corrections are a “necessary evil” in the growth markets but, as we all have experienced, some are worse than others.
These types of corrections allow the markets to digest earnings multiples. Even though the markets themselves have been going sideways, the market is becoming more valuable (based on a P/E ratio) because earnings have been increasing for two years.
The internals of the market are strong. Even though the markets are 2-5% below their 52-week highs, indicators like the advance/decline line recently hit a new high. This tells us that there is currently an underlying base behind this market.
As we have mentioned for a few months, this is a challenging market condition. However, if we look at it through “long-term goggles” it’s a healthy time and one that we think will right itself to the upside. We intend to start hen-pecking in a few areas as we feel the markets will eventually give way to higher prices and we would like to reduce our cash positions before it does.