Let's not discount the positives at home
Many of the themes that have kept stocks near highs continued to play out over the quarter that ended in June. On the plus side, U.S. economic growth appears to have accelerated in Q2 and interest rates remain low. While Brexit may muddy the picture, earnings are forecast to begin rising again in Q3 (Thomson Reuters).
Meanwhile, the increase in oil prices from record lows has not only reduced the strong headwinds in the troubled energy sector, but it has reversed the surge in yields among junk bonds. Still, a fill-up at the gas station remains quite reasonable.
Finally, the dollar's recent stability reduces the drag on revenues from firms that do a significant amount of business overseas. When U.S. companies sell goods around the globe, they must translate those sales back into stronger dollars.
A rising dollar is gift for Americans traveling overseas, but it puts a dent in the bottom line of multinationals.
Table 1: Key Index Returns - June 2016
|Dow Jones Industrial Average
|S&P 500 Index
|Russell 2000 Index
|MSCI World ex-USA**
|MSCI Emerging Markets**
Source: Wall Street Journal, MSCI.com
MTD returns: May 31, 2016-Jun 30, 2016
YTD returns: December 31, 2015-Jun 30, 2016
*Annualized **US dollars
What's an investor to do?
Control what you can control - the investment plan - and be very careful about making a rash decision based on an emotional selloff. Stocks took a beating in the wake of the Brexit vote but quickly recovered nearly all of their losses by the end of June.
I understand that we won't know the impact of what just happened in Europe in relation to our investments for months, if not years. Honestly, many analysts would concede there are more unknowns than knowns about the situation.
My goal, however, is to keep you focused on your financial goals and objectives. Emotionally based decisions rarely work out in your favor.
You may recall that my April letter touched on how markets price stocks.
To recap, markets price stocks through investors' collective buy and sell decisions. When new information is disseminated in the marketplace, stocks may react either positively or negatively, depending on how the information is viewed.
By itself, the UK's economy shouldn't send the U.S. economy into a recession.
But Brexit creates a new level of uncertainty and risk. However imperfectly, investors will attempt to price in how it may affect the U.S. and international economies and by extension, corporate profits. And that could lead to added volatility in the coming months.
Democracies can sometimes be messy. What just happened in the UK and our own gridlock in Washington are just a couple of examples.
I believe Winston Churchill described it well when he said, "Democracy is the worst form of government, except for all the others."
While we do not know where the waves of populism swelling in the U.S. and Europe may take us, they represent the will of free (if not always knowledgeable!) citizens. Democratic freedoms enable the ordinary to do the extraordinary: to innovate, create wealth and fuel new economic growth. True, free elections aren't always neat and tidy, but history strongly suggests they are a vital ingredient for long-term economic success.
And I don't know about you, but I can't imagine living under any other form of government.
Please feel free to contact us if you have any thoughts, questions, or concerns!