"Helping You Navigate the Course to Financial Freedom"
 July 2016
Earthquakes at Home and Abroad

A European (political) Earthquake that's felt at Home

Like many of you, my family and I had a wonderful time celebrating the Fourth of July holiday weekend. It was a rare occasion for my entire family - brothers and sisters, nieces and nephews - to all be together at something other than a funeral!
 
Over time, however, I've come to appreciate that Independence Day means much more than barbeques, fireworks, and colonial history. We have a degree of freedom in our nation that few today (and even fewer throughout history) have enjoyed. And that freedom came (and still comes) at a steep price.
 
We have the freedom to speak our mind, the freedom of religion, the freedom to assemble, and the freedom to question our government.
 
In addition, we have the freedom to choose our own leaders - from the local city council to the president of the United States.
Some of us are looking forward to the upcoming election and are excited about the prospect that a woman may lead the greatest nation that has ever graced the face of the Earth. Others may be eager to cast their vote for a political newcomer, hoping to shake things up in Washington.

But I am also a realist and am painfully aware that many folks aren't very enthusiastic about the choices that We the People have.
 
It's not always perfect, but we, as a nation, can and do govern ourselves. And this grand experiment in democracy has been exported around the world in many forms.
 
Political tremors create economic waves
 
This leads us to Europe--and the United Kingdom in particular. On June 23, the UK voted in a nonbinding referendum to exit the 28-nation economic and political bloc called the European Union. Though "Brexit" was chosen by a narrow margin, the people had spoken.
 
Given it's a nonbinding referendum, British lawmakers could just ignore the results. But while there has been some talk that a UK exit will never happen, at this juncture, it doesn't seem likely the referendum will be ignored, although it may be years before a full exit is actually completed.
In This Issue


New Security Procedures at MySocialSecurity 

The Social Security Administration will be implementing a new security procedure known as Multifactor Authentification (MFA) at its mySocialSecurity website as of July 30th to comply with updated technology requirements.

All new and current mySocialSecurity account holders will need to provide a cell phone number able to receive text messages.  Account holders will use their username, password, and a texted security code to now access their personal information on the website.

Those who do not or cannot use text messaging services can contact Social Security at www.socialsecurity.gov/agency/contact
to learn about other ways to access their benefit information.

 
Nonetheless, a victory by the "Leave" camp wasn't supposed to happen. While the vote was expected to be close, pollsters, analysts, and even the UK bookies all projected "Remain" would squeak through with a win. In advance of the vote, stocks rallied in anticipation "Leave" would go down to defeat.
Whether good or bad, continuity usually benefits markets because it provides certainty.
 
Recall from some of my past newsletters that markets HATE uncertainty. More accurately, short-term traders dislike added uncertainty and are much quicker to hit the sell button than longer term investors, who are more tolerant of disappointments.
 
Why might this be viewed as heightened uncertainty? Well, we're in uncharted waters. No nation has ever asked to leave the EU.
 
Could Brexit fuel other separatist movements and create additional economic uncertainty in Europe? Might we see the euro currency, which is shared by 19 nations, begin to unravel? Maybe, maybe not.
 
How might this pressure an already fragile European banking system? And will the dollar begin to strengthen as global investors see the relative safety of the U.S. as a shelter from the stormy global environment?
 
While these are longer-term concerns, there were a couple of immediate casualties. British Prime Minister David Cameron, who was adamantly opposed to Brexit, quickly resigned, and the British pound fell to its lowest level in over 30 years (Bloomberg).
 
Meanwhile, expectations of a second rate hike by our own Federal Reserve have dimmed considerably. Of course, rate hike sentiment could change again, but for now, prospects for a 2016 rate increase are almost non-existent (CME Group).

Brexit 101 - what's it all about - Click here for a fuller discussion

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
  MTD % YTD % 3-year* %
Dow Jones Industrial Average +0.8 +2.9 +6.3
NASDAQ Composite -2.1 -3.3 +12.5
S&P 500 Index +0.1 +2.7 +9.3
Russell 2000 Index -0.2 +1.4 +5.6
MSCI World ex-USA** -3.3 -4.8 -0.8
MSCI Emerging Markets** +3.3 +5.0 -3.9
 
 
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.
 
Final thoughts
 
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!


Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA), Member FINRA, SIPC. Supervising office at 678-954-4000. Financial planning offered by Compass Wealth Management LLC. Leslie Beck and Martin Siesta are registered representatives and investment advisor representatives of SFA, which is otherwise unaffiliated with Compass Wealth Management. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.  For more information visit www.compasswealthmanagement.net