Much to the surprise of the markets, the UK decided to leave the European Union in a historic vote last night. According to CNBC, most of the odds-makers were assuming the UK would remain, so this surprise has caused major volatility in the markets this morning. We think Kristina Hooper, US investment strategist at Alliance, said it best: “The reaction we’re seeing in the markets today is far more exaggerated and far more pronounced because it was unexpected.” (CNBC.com)
Going into this vote, the options market showed an expected move of +/- 45 points on the S&P 500 based on the outcome (in other words, movement of approximately 2.2% in either direction was being predicted). (ThinkorSwim Data)
We were watching the S&P 500 futures last night in real-time as the votes came in. Each time new results were posted, new moves occurred. Once the “OUT” vote was being called by UK news channels, the S&P 500 futures were down around 100 points (approximately -4.0%). Interestingly, the morning already showed signs of improvement: the markets opened roughly 45 points down (or around -2.3%), just as the options market suggested. (Morningstar.com)
Big moves like this in a short timeframe often feel more dramatic than they actually are, numerically. In the context of this week’s market movement, we have a classic case of “BUY the rumor and SELL the news”: the market ran up going into this major news event, and has now sold off once the event has occurred. Scary? Possibly. Catastrophic? Not in our opinion. In other words, we’re back to where we started earlier this week (SEE CHART BELOW). In fact, as the chart illustrates, we’re still UP from where we started the second quarter.
At Shadowridge, we’ve been on the defensive for much of this month in many of our strategies. Even prior to the UK news, we were already looking at playing it safe-er in the third quarter (which starts next week). The next few weeks will most likely be volatile, but we’ve been expecting that.
Overall, this is simply the first step for the Brits. It’s too early to tell if it will be the beginning of the next big move down, or a jittery short-term reaction. For now, the market movement is turning out to be a minor retracement of the past couple of weeks. The VIX (Volatility Index) isn’t spiking like it would in a more serious negative market, so we are cautiously optimistic at the moment. The coming week or so should be good indication of where we will head next after the initial shock wears off.
No matter what the markets do, we are actively adjusting as the landscape changes to help you navigate through whatever challenges arise.
We hope this commentary has been helpful. If you have concerns, please reach out to us to schedule a time to meet and review your personal situation. We are honored to be your advisers, and stand ready to answer your questions.
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