Markets have begun to open in the Far East as I write. So far we are seeing a bit of a carryover from Friday’s action. That is, the Pound Sterling is weak, gold is strong, equities are weak and the hand wringing is a bit feverish. This is not surprising nor is it a sign that the proverbial “end of the world” is near and it is not a sign that a crash in stocks is imminent. Headlines are driving stock prices at the moment and this is never a great time to draw long-term conclusions about the direction of the market.
There is a market adage that “Market’s don’t bottom on Friday.” I have been around long enough to know that this saying is more right than wrong and so despite the steep decline on Friday, I would not have expected Monday to shape up as a rebound day…at least at the open.
See, the BREXIT vote was a real surprise. Sure, the polls were pretty close but there was a real sense that the vote would go the way of “IN.” The news articles highlighting the regret of many (maybe well over a million) voters who were comfortable casting a vote in favor of BREXIT simply because they felt the vote would go the other way. Similar to the dog that ends up catching the car it was chasing, the sentiment of these voters is “Whoops! Now what do we do?
The market does not like big question marks hanging over it. So, even though the question mark surrounding the BREXIT vote has been removed, a few more have popped up. Importantly, the question of how to actually separate from the EU is a big one. Additionally, many members of the U.K. leadership, including the Prime Minister, have resigned.
So, the markets are pretty volatile and the press is going absolutely crazy over what BREXIT means. Despite all of this hysteria, we remain calm. As I pointed out on Friday, the U.S. equity market has not even retraced two weeks of gains. While retracing two weeks of gains in one day can put a damper on your weekend, it simply highlights that emotion is in control. When emotion is in control, fundamentals and logic are not.
During periods when emotion is driving market activity minute-by-minute, it is wise, we believe, to do more observing than acting. Our activity took place before the vote. Prior to the BREXIT vote we spent a great deal of time working through what an “IN” or “OUT” vote would mean to the global economy, the U.S. market and our clients’ portfolios. Our best guess was that the “IN” vote would prevail, but that the vote was close enough that it was important to have a game plan for a “OUT.”
Trimming a few positions in our managed accounts so that we would have some cash to take advantage of an “OUT” vote was one step we took. Looking at the possible fallout of an “OUT” and its impact on stocks was important, too. One outcome we felt most confident in was that if an “OUT” vote prevailed,
markets would be roiled. However, just because we felt that this would be the case, it did not mean we felt selling every stock or anything close to this made sense. After all, the U.K. leaving the EU did not mean the U.K. would no longer exist. It does not mean the EU will no longer exist either. Similarly, it does not mean that large, well-capitalized companies that make up the bulk of our holdings in client accounts are going to see a seismic shift in their business.
The vast majority of the volatility and stock price weakness seen on Friday and into this coming week has little to do with company fundamentals and everything to do with emotion, namely fear. Once the dust settles down on the news flow, a few of the details about the exit are mapped out and second quarter earnings from U.S. companies filters out, then we will have a sense of the market’s glide path.
We do not, nor will we ever look to headlines for investment guidance. The press is our friend when they feed on investor fears and help to drive stock prices down because we have a better opportunity to find attractive companies at attractive prices. It is what we see happening as we speak.
None of this happens in a vacuum. Plans are being put in place to take advantage of an “independent” U.K. Cash that has been sitting on the sidelines for a long time is now going to find its way into equities as other opportunities, like bonds and cash, look even less attractive than before. This short-term volatility serves as an opportunity for some and we consider this to be the proper view.
As always, our focus is on our clients first. We never lose sight that our job rests on the trust of our clients. We are working very hard at discerning what BREXIT, the U.S. presidential election, the Fed’s policies, etc. mean for the precious investment portfolios our clients have entrusted to our management. I speak for all of us here at KIG when I say, “Thank you.”
Kessler Investment Group, LLC