A Divided United Kingdom – What Now For The Market?

Weekly Market Image

United Kingdom gives new meaning to being out on an island…
The worst market day in nearly 1 year…
Winter is finally here…

A lot to discuss following the UK vote in favor of leaving the European Union (now known as the “Brexit” decision). I will cover what’s going on, what I think and how we view the market right now in our world of managing client funds.

A picture is worth 1,000 words: Eight of the 9 major U.S. market sectors were negative for the week (as shown in the first chart above). The U.S. market looked poised to test its record high prior to the UK vote, but that quickly changed. Take a look at how the 500 stocks in the S&P 500 performed on Friday alone:

S&P Map - 06-24-16

Amid that sea of red, it’s clear the UK wasn’t the only one hitting the exits. Investors did too, resulting in a selling spree best summarized by these facts:

  • Friday was the worst day in 10 months. The S&P 500 fell -3.6%
  • Thanks to prior gains though, the S&P only fell -1.6% for the week
  • However, it was the 3rd-straight weekly loss for U.S. stocks. The last 4-week losing streak? Oct. 2014
  • The S&P finished at its lowest weekly closing price in 3 months. Our analysis cares about these week-to-week changes.

To keep things in context, we are trend followers and 1 day does not make a trend. The S&P remains fractionally positive (up +0.7%) entering this week. More on this in a moment.

What is the EU? The United Kingdom (England, Wales, Scotland, Northern Ireland) voted by the slim margin of 52%-to-48% to leave the European Union (EU). The EU is a political/economic union comprised of 28 member nations throughout Europe aimed to promote productive and cohesive trade, immigration and economic policies. This 2-minute video from The Telegraph gives a good overview:

For a more detailed history of the European Union, check out our “Links” section below.

For Europe this is a massive deal. The UK economy generates roughly $3 trillion in gross domestic product (GDP) each year, which is 20% of the EU total. Immediately following the vote to leave, the British pound currency plunged relative to the U.S. dollar. British Prime Minister David Cameron resigned, adding more uncertainty over future political leadership. There will be unknown fallout when it comes to trade and immigration. There is even concern over funding for production of future “Game of Thrones” episodes. Finally, of course, what all this means to investors.

About last week: In last week’s Market Thoughts post I detailed how important I felt it was for the S&P to hold above 2,050. Thanks to Friday’s close of 2,037 it did not. Many of the technical measures we use to manage client accounts worsened last week across all 9 sectors except Utilities. To be specific, some of the measures we use to inform how we manage money include price vs. various moving averages (attempts to measure trends) and relative strength (attempts to measure buying vs. selling momentum). These worsened across the board and across multiple timeframes.

Turn up the volume? One of the things we look at is the amount of market trading activity (volume). When high volume is combined with big price moves it can lead to momentum in the direction of that up-or-down move. On Friday alone following the Brexit vote, 320 million shares of the S&P 500 index-based fund “SPY” were bought/sold. This was the most for any day since Jan. 15th and nearly the same amount as the previous 4 days combined. The S&P was down -3.6% Friday, so perhaps more selling is to come. This is not a prediction, merely an observation.

It’s not about Brexit: If the market sell-off worsens in the coming days, you will hear a heap of blame continue to be placed on the UK decision to leave the EU. For those who need a narrative to explain market moves, go right ahead. But just remember, the market has not made a new high for over a year. Said differently, investors have had such little conviction to buy stocks that the S&P sits at the same place it did ending 2014. Just think about that for a second… I can promise you the reason investors have been lukewarm for 18 months has had nothing to do with a looming UK Brexit vote. No one really knows.

For whatever reason, the bottom line is the U.S. market has remained flat. Investors have been unwilling to buy when the S&P 500 price has scaled above 2,100. Here is your reminder:

SPX Monthly - 06-24-16

The one thing I added here is the Relative Strength Index (RSI), which has been in decline as the market remains flat. This is just one timeframe, but this monthly RSI reading is an ongoing concern worth watching.

Furthermore, this weakening momentum in RSI did not start Friday. It has been incubating for a while and is simply the result of failing to reach new price-highs over a prolonged period of time. It may also help explain why the market has seemed to take an escalator on its way up and an elevator on its way down – investors have doubted the broad market picture to where they remain quicker to sell than to buy.

Real estate: Existing home sales hit the highest level since Feb. 2007. Sales activity increased nearly +2% in May and are up +4.5% from one year ago. Listed homes were on the market for an average of 32 days, which is the fewest since 2011. Sales here in the West continue to lag the national average, up just +1.7% from May 2015. However, the West continues to lead in terms of price growth, as the median price is up nearly +8% above the same time last year.

Plan, Process, Position: Whenever world events and market turbulence intersect, you hear a lot about what you should or shouldn’t do when it comes to investing. Here is my list of advice:

  1. If you have an investment process, keep doing it.
  2. If you do not have an investment process, get one.
  3. Your investment process should fit within your financial plan.
  4. Your financial plan is only useful if it has evolved with your life.
  5. If you work with a financial advisor, know whether he/she manages your money versus solely helping you plan. Yes, there is a difference.
  6. If your financial advisor manages your money, they had better use the same process for you that they use for themselves.

(To be clear, a conservative investor/portfolio will obviously differ from an aggressive one in terms of make-up. But your advisor should use the same process and methods of analysis for making buying & selling decisions. For example, part of our investment approach involves playing defense if we feel it is appropriate toward managing risk. While the amount of investment defense we play will be greater for our conservative investors, we will play some level of it for all clients.)

Just because Warren Buffett says he is buying stocks does not mean you should too. Conversely, just because your coworker says he/she is selling them does not mean that you should too. Just because you hear an advisor say that the market is “cheap” absolutely does not mean that it is.

Advisors will tell you not to panic, and in a vacuum, I agree. But what if short-term panic results in positive change? If panic forces you to realize that you do not have a financial plan, or that the one you have is outdated, that is a good thing because it means you might do something about it. The truth is, most people do not have a financial plan or a defined, investment process to guide how their investments should be positioned.

I am happy to expand on these issues. Just shoot me an email. This is important in a world dominated by what people attempt to preach in 140 characters and a 24-hour news cycle driven largely by ratings and internet clicks. Speaking of clicks, on to the Links!

Links This Week

About Percension

Percension Wealth Advisors, LLC is a Seattle-based Registered Investment Advisor. We manage long-term investment portfolios for clients, within the blueprint of the specific financial plan we create for them.

Sincerely,

Brian E. Betz, CFP®
Percension Wealth Advisors, LLC
Seattle Registered Investment Advisor

401k Rollovers | IRA Money Management | Financial Planning

Office: (206) 455-2765

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