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Now comes the reckoning

Ken Armstrong, Shane Fleury and Steve Shanley
The Northwestern Mutual Wealth Management Company — Vail Valley

Back in January of 2013, Great Britain’s Prime Minister David Cameron pledged that, should his Conservative Party win reelection, he’d give voters a “simple choice” about whether or not to stay in the European Union, long a divisive topic. But even with three-and-a-half years to get ready, the world, and even Brits, seemed stunned by Thursday’s vote that made the Brexit a reality — and roiled financial and currency markets across the globe.

Animated by economic uncertainty and anti-immigrant sentiment, the “leave” campaign won by an unexpectedly wide margin of 52 percent to 48 percent. More importantly, the decision spawned a rash of new questions that will keep global investors off balance for months.

• Question number one: Who’s going to be Britain’s new prime minister? Though he claimed to have no “precise timetable,” Mr. Cameron said he will likely resign by October and leave the transition out of the EU to his successor, whomever that might be. Boris Johnson, the former mayor of London and a proponent of the Brexit, is seen as a front-runner.



• Question two: How long will it take for Britain to officially extract itself from the EU? Some have speculated it could be as long as two years, but on Saturday Jean-Claude Juncker, the president of the European Commission, said, “I would like it immediately.” In any case, as Britain is Europe’s second largest economy (after Germany), the separation will be complicated and, most likely, messy.

As Mr. Juncker noted, “It is not an amicable divorce.”



• Question three: Will Britain fall into a recession, and will it take Europe or even the United States with it? The British pound tumbled 7.6 percent against the dollar on Friday; the Stoxx Europe 600 Index shed 7 percent, its sharpest drop since 2008; Japan’s Nikkei fell 7.9 percent; the Dow declined 3.4 percent, and the S&P 500 3.6 percent. Still, it may be weeks, perhaps months, before the long-term economic impact of the Brexit can be fully assessed.

For the week, the fall of the major U.S. indexes, despite Friday’s plummet, was modest as they’d gained ground on the presumption that Britain would stay, and on Thursday the Dow had even moved back over the 18,000-point mark. Nonetheless, on Friday investors fled for safe havens, and the yield on the Treasury’s 10-year dipped to 1.577 percent. Meanwhile, Mark Carney, the governor of the Bank of England, tried to reassure markets, saying, “The bank will assess economic conditions and will consider any additional policy responses,” including making ₤250 billion ($370 billion) available funding for banks and financial firms. “There will be a period of uncertainty and adjustment,” he said.

• Question four: Will a domino effect further rattle global markets? Not only did Scotland, which voted to stay in the EU by a 62 percent to 38 percent margin, indicate that it might hold a referendum of its own about leaving the EU (with Northern Ireland apparently pondering the same step), but populist and anti-immigrant parties such as those in France and Austria might now push to exit the EU, leaving the idea of a united Europe, and a globalized economy, in tatters.



These are just some of the many questions that the Brexit, conceived in 2013 and executed in 2016, has raised, and that will begin to be answered over the coming weeks, months and years.

Yellen on Capitol Hill

Though it may be hard to remember, there was some other news last week that preceded the Brexit vote. For instance, the Federal Reserve’s Chairwoman Janet Yellen appeared on Capitol Hill and, even before the voting in Britain began, indicated that the Fed was unlikely to raise its benchmark rate anytime soon. While she said she was optimistic about the economy’s long-term prospects, she added, “Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace.” And while it may be hard to see a bright side, the ever-cautious Fed is likely to wait even longer before its next hike, with Ms. Yellen having told Congress that the Brexit “could have significant economic repercussions.”

Passing the latest stress test

With talk of recession in the air, the Fed announced that, based on the latest round of stress tests, all 33 of America’s largest banks, those seen as “too big to fail,” now have enough capital set aside to survive a recession even when, based on the Fed’s projections, they could lose as much as $526 billion.

Back to the polls

Though overshadowed by the Brexit, Spaniards went to the polls yesterday for the second time in six months; since the last round of elections in December, the three leading parties have been unable to form a ruling coalition — or a government — and the country also faces anti-EU sentiment. In other news, existing home sales rose 1.8 percent in May from April to an annualized rate of 5.53 million, a nine-year high. New home sales, meanwhile, fell 6 percent in May from the month before to 551,000. Durable goods orders declined 2.2 percent in May from April; orders for durable goods excluding transportation were off 0.3 percent, and orders for nondefense capital goods excluding aircraft fell 0.7 percent. The University of Michigan’s Consumer Sentiment Index dropped to 93.5 in June from 94.3 in May. And first-time jobless claims fell 18,000 to 259,000 for the week ending June 18; the four-week moving average for the week ending June 11 dipped 2,250 to 269,250

A look ahead

Though the fallout from the Brexit will dominate this week’s news, there will be a number of updates fated to get all but lost in the headlines, including the latest on personal consumption, income and spending; the advance trade balance; the S&P/Case-Shiller Home Price Index; pending home sales; construction spending; vehicle sales; manufacturing; and the government’s third estimate for first-quarter GDP, which is expected to reach 1.0 percent after the advance estimate of 0.5 percent which was later revised up to 0.8 percent.

This commentary was prepared specifically for local wealth management advisors by Northwestern Mutual Wealth Management Company®.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

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The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.


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