I hope you had a great weekend! Happy Fourth of July week!
LRPC’s Monday Morning Minute for this week, “Brexit: What You Should Know” (presented below) comes to you courtesy of Schwab. As an independent, objective Registered Investment Advisory (RIA) firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share the most relevant information with you each week. If you are short on time, take a look at each major heading below.
The Brexit frenzy continues! I thought you might find it helpful to receive an article this week that outlines what is important to know about Britain’s historic vote. There is a lot that is being written and talked about regarding Brexit. It certainly is the crisis of the moment. My hope is that this piece allows you to cut through all the chatter and take a look at what has meaning.
Have a wonderful week!
Brexit: What You Should Know
By Schwab Center for Financial Research
Britain’s surprising vote to leave the European Union — a development commonly known as the “Brexit” — prompted a sharp decline in global financial markets, and the volatility has continued. We believe it will take time for the shock to fully work through the economic, financial and political systems in the United Kingdom and Europe. Here are our answers to commonly asked questions about this historic event:
1. What is the timetable for making the Brexit a reality?
The U.K. needs to pass legislation formalizing the referendum results, and then request an exit according to Article 50 of the Lisbon Treaty. It is unlikely this will happen before the U.K. installs a new prime minister (current Prime Minister David Cameron has said he plans to step down by October). Negotiations are then required to be completed within two years, unless the EU and U.K. agree to an extension. Once an agreement is reached, it will need a majority vote by the European Council and likely approval from British Parliament. These are uncharted waters, but our projections are that the entire process will take years, not months. For now, nothing changes. All trade and border agreements will remain in place until the exit process is completed.
2. Will a Brexit cause a recession in the United States or globally?
We don’t think so. The current level of growth in the United States isn’t spectacular, but estimates for the second quarter are that gross domestic product (GDP) will grow by 2.5%. A bigger economic hit would have to occur to trigger a contraction. The U.S. economy also is not hugely dependent on Europe, meaning the impact isn’t likely to be significant, even if the European economy slows further. A stronger U.S. dollar following the Brexit vote hurts U.S. exporters and manufacturers, but both have been battling a stronger dollar for some time and it hasn’t sent the U.S. economy into recession thus far. The Brexit vote does heighten the potential for a recession in Europe, however, and is likely to be a further drag on already slow global growth.
3. How does this affect the Federal Reserve’s plans?
The Brexit could be another reason for the Federal Reserve to hold off on raising interest rates, and we don’t expect higher rates anytime soon. A rate cut by the Fed, meanwhile, is unlikely. We expect the Fed and other central banks to ensure that financial market participants, especially big banks, have the liquidity they need to prevent any disruption of financial markets. If need be, the Fed could take some other action to ease financial conditions besides a rate cut, such as renewing its bond-buying program, known as quantitative easing, to increase the money supply.
4. Is this the start of a major crisis on the scale of the Lehman Brothers collapse that led to the financial crisis in 2008?
The financial sector took a hit following the Brexit vote, raising questions about whether this was the start of another financial crisis similar to the one that occurred in 2008. While there will be increased volatility, we don’t believe this represents another potential systemic crisis for the financial sector, either here or in Europe. The environment has changed drastically since the period leading up to the 2008 crisis. Then, lending standards were low and the regulatory environment was much looser. Now, both here and in Europe, credit is much tighter. Regulations have increased, and banks are better capitalized. Combined, these changes reduce the risk to the financial system, in our view.
5. Does this change the outlook for U.S. stocks and corporate earnings?
In the near term, uncertainty will likely cause more volatility and raise the possibility of additional sharp pullbacks, but we don’t envision a bear market for stocks. We are neutral on U.S. equities — we don’t believe you should be overweight or underweight to stocks based on your target asset allocation — and we believe that the market will ultimately recover from the shock of the Brexit vote. Corporate earnings are likely to improve from the first quarter, but the pace of earnings growth is expected to be modest in light of recent events.
6. How does this affect the global bond markets?
Demand for U.S. Treasuries and Japanese government bonds — which investors often buy in times of crisis because of their perceived safety — probably will ease as the markets settle down, but yields are likely to remain low because of growth concerns. Also, peripheral European bond yields are likely to move higher relative to core bonds because of concerns other countries also could seek to leave the EU. In the U.S. bond market, the spread between riskier corporate bonds and Treasuries will likely widen in the near term. Spreads on investment-grade and high-yield bonds relative to Treasuries have narrowed so far this year to near their long-term average levels, so the market really wasn’t pricing in the potential for a Brexit to occur. Financial and energy sector bonds are likely to be the most vulnerable. Preferred securities may come under some pressure because banks and finance companies, some of them in Europe, are among the largest issuers of such securities.
7. What should investors do now?
Investors focused on the short term should be prepared for further stock market declines over the next three to six months, similar to past shocks. We believe volatility will remain a major characteristic of markets throughout the rest of 2016. Longer-term investors, however, may want to maintain their diversified asset allocations, which are intended to weather volatility over the longer term. Unexpected events like this are a reminder that high-quality bonds can provide ballast to a portfolio, as they tend to perform well when stock markets fall and to reduce overall volatility in a well-diversified portfolio. We suggest investors get reacquainted with the goals they set for their portfolios when they began investing, and make sure their asset allocations are still aligned with those goals.
About LRPC’s Monday Morning Minute
Lawton Retirement Plan Consultants, LLC (LRPC’s) Monday Morning Minute is crafted to provide decision-maker’s with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.
Additional Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk and liquidity risk. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.