Take Your Time, Do It Right

by Ralph Cole, CFA Executive Vice President of Research

As we came into the week, markets were continuing to sell off in response to the U.K.’s vote to leave the EU. After falling 1.8 percent on Monday, the S&P 500 began to rally on Tuesday. Through today, the market was up over 3 percent this week. International stock markets experienced a relief rally as well and were up over 3.5 percent by Friday. It appears to us that the markets have come to realize that “Brexit” is a long-term process and will take years, not days, to sort out. Furthermore, it is in the best interest of all parties that this process plays out as smooth as possible and doesn’t disrupt global economies. To that end, we believe the market has correctly anticipated that European policy makers will likely initiate “stimulative” fiscal policy.


Growth pressures around the world abound, which continues to move U.S. bond yields lower. The 10-year Treasury ended last week at 1.55 percent and traded today at 1.44 percent after touching an all-time, intraday low of 1.378 percent earlier today. The exact timing of Brexit is unknown, but economic experts expect the U.K. will now enter recession in 2017. Projections are for business investment to fall due to uncertainty surrounding future trade policy. With the sixth largest economy in the world moving toward recession, it will be a further drag on global growth. As such, we believe this is the main reason policy makers will begin to consider and implement fiscal stimulus.

Pleasant Surprise

Despite recent developments in Europe, economic data this week was surprisingly upbeat. Specifically, the week ended with countries from around the world announcing their Purchasing Managers’ Index (PMI) data for the month of June. This manufacturing data from the Eurozone and U.K. surprising on the upside, while the U.S. Institute for Supply Management (ISM) manufacturing index came in stronger than expected.  While most of this data was collected before the Brexit vote, it does give us some hope that the manufacturing slowdown is abating.

Our Takeaways for the Week

  • Cooler heads prevailed and markets regained their footing post Brexit vote
  • We expect fiscal policy to become more “stimulative” in Europe