Bottom Line In an extraordinary overnight development, the U.K. voted 52% to 48% to leave the European Union. Prime Minister David Cameron, who supported the Remain camp, immediately fell on his sword, announcing he will resign in October after a transition period to select a new
U.K. leader. Equity markets here and abroad plunged today, while havens such as the U.S. dollar, gold and Treasuries surged.
Despite the fact that yesterday’s Brexit vote appeared to be a virtual coin flip—with the forecast for rain in London and its impact on voter turnout perhaps the deciding factor—stocks had inexplicably risen in the two prior weeks. Investors appeared to be whistling past the proverbial graveyard. From our investment perspective, however, taking a decidedly more defensive, risk-off point of view was a wiser course of action, as the financial-market environment remained perilous.
Aside from the near-term ramifications from Brexit, the U.S. labor market has stalled over the past three months, core PCE inflation has ticked down over the past two months, and economic growth and corporate results have decelerated sharply over the past several quarters. To be sure, the Federal Reserve is probably now on hold until at least its December policy-setting meeting. But the U.S. presidential-election conventions next month could add to the market’s angst, due to the uncertainty surrounding fiscal policy decisions in 2017 and beyond.
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