June 24th, 2016 is a big day for the US markets, and an even bigger day in history.
To begin, the European Union lost a massive powerhouse. Great Britain is one of the two powerhouses in the EU, the other is Germany. Great Britain has its own currency as well as its own central banking system, which is what separates it from the rest of the EU and also makes it a valuable asset. Being the powerhouses of the EU forces them to be the key factors in supporting a number of countries in recent years: Greece, Spain, Portugal, France, and Italy to name a few. Leaving the EU eliminates this responsibility for Great Britain, however it exposes them to a number of risks. Greece is within the EU, however it used to be on its own currency. Its currency was devalued until it was no longer usable. As of 12:00am 6/24/16 the GBP was down over 10% in a matter of hours. Currency has no limit down rule (halt), so it had the potential to get much worse without any remorse. At the same time, the US e-mini S&P500 futures went limit down (5% loss) and had halted for 15 minutes before reopening for trading.
The Great British Pound
GBP is devalued nearly 10%. It now risks its currency (GBP) to become obsolete and unusable similar to the Greek Drachma. If this happens, which is a long shot but a possibility, it will be begging to be a part of the EU again. The ECB (European Central Bank) will have the ability to deny this as the next powerhouses of the EU will be forced to bail out GB should it get to that point. This is a major risk for GB. As previously stated it may not be probable at the moment, but it is possible given recent events.
Another risk to the EU as a whole:
If Great Britain is successful on its own without the help of the EU or the ECB it is possible for Germany to do the same thing in our opinion. Germany will be left out to dry in the EU without Great Britain. It will be responsible for any EU debt and financial responsibilities in the future. It would make sense to leave the EU in our opinion, and in that case the entire European Union would be open to a collapse. In today's trading session, the smaller European countries felt an enormous ripple as well. Most notably Italy and Spain, with both markets being down around 10%. A drop like this is something that larger economies can recover from (U.S in January '16) but an event like this in a smaller more dependent country is a catastrophe. Obviously this would be very detrimental to the world as we know it, but we are not counting it out. Money has to come from somewhere. Wealth is not created, it is collected. Great Britain and Germany would be taking wealth away from the EU.
In regards to the US markets:
The futures and US indices saw a nasty leg down Friday June 24th, 2016. Overnight S&P 500 futures were down over 100 points. The Dow opened down nearly 500 points. The last day like this was August 24th, 2015; Dow gaped down 1000 points and trended higher the rest of the day. This was one of the worst days since 2008, so June 24th, 2016 will be in the same basket as that. In the long run this may be beneficial for the US markets in our opinion. It is possible for European and British investors to pull their capital out of the European Union given its instability and pump it into the US markets. With that being said, it will be a rocky road in the short run. VIX (Volatility index) spiked almost 30% during today's trading session. Although it is possible the S&P will climb back to the 2100 in the upcoming months, it will surely be an unpredictable process. Whether it is the US equity markets or the housing market, we see this as a strong possibility. In addition to this, Fed Chair Janet Yellen stated that a 2016 rate hike is no longer on the table given the recent events. The Fed also stated that a rate cut is a reasonable possibility. We believe that a rate cut is highly likely, and that negative rates may also be on the table for the 2017 and 2018 fiscal years. Is quantitative easing 4 off the table? We won't completely push it off the table yet, but after the Brexit anything is possible.
What does this mean for Main St?
No one is going to go bankrupt due to this. No one is going to wake up with no money in their accounts. This is one single event. Yes, there are longer term repercussions but for now it is just one single event. Long story short, yes the market will get nasty in the short term. If the markets do demonstrate longer term weakness we also believe that there are a few industries that will benefit from this event- commodities and precious metals should rise due to the uncertainty with global equities. Precious metals in particular have risen, for they are much more stable investments. In particular, gold shot up 5% today, as well as silver being up 2.5%. In the long run, we are uncertain how the euro as well as the pound will fare in the future. This will lead to a promising future in more stable commodity investments.
To sum it all up, this is a massive day in history. Great Britain left the European Union, Prime Minister David Cameron immediately resigned, and traders around the world are now questioning the state and stability of the global economy. Will this blow over? We believe that "the show is over when the fat lady sings", but all we hear is silence.