The United Kingdom’s unexpected decision to exit the European Union on June 23rd has created an air of uncertainty in both foreign and domestic markets.
The “Brexit” shock was initially most apparent in the European markets with foreign stock indexes declining by 10% or more in two days. Foreign banks were hit especially hard by the surprise vote to leave, as questions arose about many operational issues that will no doubt impact how foreign banks conduct business among other EU member countries.
Of course there is much speculation over what will be next. Will other countries follow the U.K.’s lead and exit the EU? What will be the relationship between the U.K. and the remaining members of the EU? There are definitely many questions to be answered. And, given the complexity and bureaucracy involved in the pathway forward, we definitely expect more in the way of volatility for investors – at least in the short term.
From a global perspective, it is becoming obvious that the U.S. has become a safe haven of sorts. Within a few days, domestic stock indexes pretty much recouped post-Brexit losses and are now actually within striking distance of their high water mark.
The bond markets have continued to provide investors with relative stability and income, even as interest rates remain at historic lows. We do expect this “stability” to come at a price to investors over time. Continually low interest rates will most likely lag the rate of inflation over the longer term.
The Federal Reserve Board has indicated that it will take a “wait and see” approach with interest rates over the next several years. That is, wait and see what impact Brexit will have on global economic activity and growth levels before continuing with any planned interest rate hikes.
With an especially messy election year in store, who knows what the short term will bring in the financial markets?
The good news is that for long term investors, the “noise” that happens in the short term really does not impact progress towards your long term goals at all! In fact, for those investors who are actively saving for retirement (accumulators), any market declines should be embraced as an opportunity.
Why International Stocks?
You will note from the performance information in the tables above that there has been quite a bit of disparity with returns over the last five years. Foreign stocks have barely squeaked out positive returns, whereas U.S. stocks have achieved returns that exceed historical norms. Given poor recent performance, many investors are likely rethinking their allocation to international stocks. Some are considering reducing, or even eliminating international stocks from their portfolio all together.
We believe international stocks are poised for above-average returns. Avoiding, or even eliminating this asset class from your portfolio would be a mistake. Building an enduring portfolio that is adequately diversified, means investing in markets that are temporarily out of favor!