Brexit or Bremain?
The major market indices finished the week lower reflecting caution ahead of the upcoming vote on whether the United Kingdom will leave (Brexit) or stay (Bremain) part of the European Union.
June 20, 2016
| By Mike Schwager
Performance for Week Ending 6/17/16:
The Dow Jones Industrial Average (Dow) fell 1.06%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.19%, the Standard & Poor’s 500 Index (S&P 500) finished off 1.19% and the Nasdaq Composite Index (NASDAQ) shed 1.92%. Sector breadth was negative with 8 of the 10 S&P sector groups finishing lower. The Healthcare sector (-2.08%) led the way lower followed by Technology (-1.95%) and Financials (-1.93%).
||Closing Price 6/17/2016
||Percentage Change for Week Ending 6/17/2016
||Year-to-Date Percentage Change Through 6/17/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 6/13/16 – 6/17/16
The major market indices finished the week lower reflecting caution ahead of the upcoming vote on whether the United Kingdom will leave (Brexit) or stay (Bremain) part of the European Union. The pending vote has ignited worries over the impact on global growth if UK citizens decide to leave. Federal Reserve Chair Janet Yellen and central banks in Britain, Japan, Canada and Switzerland have all warned about the potential for economic damage in the event of a secession.
Recent polls suggest the vote will be very close, with some giving the edge to the leavers. While uncertainty surrounding the situation has recently been taken up a few notches, anecdotally many financial professionals believe that the UK will ultimately remain part of the union. Similar citizen polls over the past couple years (e.g. Scottish referendum) have been well off base, and the thinking goes that when push comes to shove, people tend to speak from their heart but vote with their head. Betting markets are also showing “Bremain” odds in the 60%-plus area. With that said headline risk and uncertainty around the vote will remain elevated right through Thursday.
FOMC Meeting – Likely Lower for Longer: As expected last week’s Federal Open Market Committee (FOMC) meeting ended with NO change to monetary policy. The after meeting statement noted that the “pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” According to the so called “dot plot,” the median estimate is still for two rate hikes by year-end, although six Fed officials now have their “dots” in a position that suggests only one hike, which is up from only one Fed member at the March update. The central bank did reiterate that interest rates are likely to rise at a “gradual” pace, however, they did not refer to any specific timing for the next increase. The lack of commitment resulted in drop in rate hike probabilities. According to Bloomberg, Traders now see only a 21% chance of a hike at the September meeting and a 38% probability at the December meeting. Two weeks ago those probabilities stood at 42% and 58.5%, respectively.
The Week Ahead: The focal point in the coming week will be Thursday’s vote by British citizens on whether they should remain a member of the European Union. Results of the vote will likely become clear by Thursday afternoon. Ahead of the Brexit vote, Fed Chair Yellen will take to Capitol Hill for her semi-annual testimony to Congress on monetary policy. On Tuesday Yellen will present to the Senate Banking Committee followed by a repeat performance to the House Financial Services Panel on Wednesday. Reports of interest on the data calendar include May existing home sales, the June Purchasing Managers’ Manufacturing Index (PMI), May new home sales, May durable goods orders and June consumer sentiment. Second quarter earnings reports will begin to trickle out with 9 members of the S&P 500 scheduled to report. Also of interest will be the release of the annual “stress tests” results from the Federal Reserve on the nation’s 33 largest financial institutions.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
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Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
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