Get on board!
Thursday’s “Brexit” vote shook up markets worldwide. Strong reactions from commodities, stocks, bonds, currencies – everything was affected by the vote. Whether that’s warranted or not time will tell. Is it the beginning of the end for the European Union? After all, the United Kingdom was not a part of the Euro currency and thus was really sort of only halfway into the EU anyway. Is this the first really serious rejection of the past couple of decades of globalization? It seems so. There appears to be those who embrace globalization as a positive force for how we can now seamlessly move goods and services around the world in one massive marketplace. Those are often younger people who have grown up in the internet-connected world. The older folks sometimes are quite uncomfortable with a world where national lines are blurred and their job skills are quickly not so in demand. Every generation has their “good ole’ days”. The changes between those days and the present are enormous, dramatic, and have had huge impacts. Not surprising there would be a backlash by some. London is a global financial capital. Is that title in jeopardy now that England is not part of the European Union? We admit to not being familiar with the possible paths for England after this referendum. But if the vote stands, one would think that banks shift away from London to some other European financial center. With finance being a substantial part of the London economy, it seems that would be a significant blow to the city and country.
Similar strains of that anti-globalization song are heard in the U.S. with the rise of Donald Trump’s nationalism. Not a huge number of young people in his camp either, we note. An article this week pointed out that half or more of new jobs in the U.S. require some sort of “coding” or computer programming experience. Whether that means actual knowledge of a computer language, or just the ability to manipulate an Excel worksheet and/or build a basic website, we are not entirely sure. But that fact speaks to the rapid and dramatic change in job skills required. If you don’t even know what coding is, how must you feel?
The world is always changing. Those who fail to embrace the inevitable pace of change get left behind. Has Britain taken a step back from embracing that change and therefore made itself less relevant in today’s world? It would seem so depending on how things proceed. For all the hullabaloo of the markets overnight, we offer the following chart. You will be hard-pressed to find today’s market “crash” as the Brexit vote has merely undone market action earlier in the week when polls suggested a different outcome. Could this move kickstart a bigger market decline? Of course. For now, stocks have given up only about -1% on the week. That’s the normal course of business for stocks. No big deal. Keep your eye on the dotted line below.
Chart 1: Dow Jones Industrial Average remains locked in a trading range – even with Brexit plunge
Where the money is going
Consistent with the notion of anti-globalization is the issue of income inequality. Without the right job skills to take advantage of today’s marketplace, it’s ever-harder to work your way up the income ladder. See below the increasing numbers of upper middle class citizens. Getting there requires an embrace of the internet, global economy, Facebook, Amazon, and all the connectedness that smartphones and technology have brought. You’re either on that train or you’re not. If you’re not, why not get on board? You undoubtedly use Amazon to shop. You like the convenience that brings. But some rail against the forces that created that wonderful technology? Embrace change and innovation or get crushed by it has been the harsh message.
Chart 2: How the population’s wealth distribution is changing
Investors and markets were once again swung around this week by polls displaying the latest expectations for the British “Leave” or “Remain” vote for membership in the European Union (EU). We know now that the “Leave” camp won the vote throwing Britain’s future relationship with the EU into uncertainty. However, the week was largely taken up by polls reversing the prior week’s view and showing that most UK citizens favored remaining part of the EU. That shift away from the “Leave” camp caused a rally in share prices through the first four days of the week.
(The “Leave” position viewed as disastrous by almost all finance and economics experts, and therefore disliked by stock investors.) Monday brought a +0.6% gain for U.S. stocks on the optimistic poll reading with Tuesday’s session tacking on another +0.3%. Wednesday posted a flat session with stocks giving up modest early advances as UK polls backtracked to a dead heat between the two camps and oil inventories disappointed investors by showing less of an inventory drain than expected. Optimism about the possible success of the “Remain” campaign fueled a rally Thursday, the day of the voting in the UK. Stocks boosted +1.3% ahead of the referendum’s overnight outcome. As results were tallied over Thursday night, it became clear that the “Leave” camp had indeed pulled out a shocking victory. The S&P 500 futures fell as low as 2000 – a full -5% below their recent level – in overnight trade before paring those losses to about -3.5% just before the New York market open. But the Friday trade was miserable with no buyers interested in stepping in to buy stocks at the newly discounted prices. Bond prices and gold soared. Currencies shifted wildly. And stocks ended the day down -3.6%, a touch lower than where they started the trading session.
Warm wishes and until next week.