A No Deal Brexit

As you may have heard, last Tuesday, July 23, the U.K. elected a new pro-Brexit prime minister, Boris Johnson, who has pledged to leave the European Union by October 31st whether or not a deal has been struck between the U.K. and the European Union. This rhetoric has further increased the perceived odds of a no-deal exit. Global market indices have largely shrugged this off. The S&P 500 (the 500 largest companies in the U.S.) has risen 0.5% since Tuesday, and the EFA (iShares MSCI EAFE ETF, an international stock measure) declined only a very modest -0.75%.

The global and U.S. stock markets are forward facing, and when they get any whiff of a political uncertainty or a potential global event, they immediately react. Negotiating anything but a no-deal Brexit has been a challenge for quite some time, and, therefore, is partially “baked in” to U.S. and global stock prices. 

According to UBS (see link to article below), the market is now pricing in roughly a 50% chance of a no-deal Brexit. Of course, UBS cannot predict the final Brexit outcome with certainty, but they believe that current global stock market prices are exaggerating the chances of a no-deal Brexit in the short term. Therefore, any outcome better than a no-deal Brexit may well be positive for U.S. and global stock markets.  On the other hand, if the U.K. were to leave the European Union without a deal, there will still likely be a negative impact to the markets, but more muted than if this were a surprise.  We feel that we have accounted for each of these potential scenarios in your portfolio construction.  To learn more, please click this link.

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S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

iShares MSCI EAFE ETF (EFA), is an ETF that tracks the MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.