This morning we awoke to the historic news that Britain has voted to leave the European Union. Given that markets had positioned for a vote to stay in the union, this decision has produced shockwaves through global markets. Given this news, we have outlined our thoughts regarding this historic day and what it may mean for the market and our portfolios.
While the overnight moves in a variety of markets have been quite severe, we have no reason to panic while others are losing their heads around us. Our Prime Series portfolios have been positioned defensively for some time, hold many hedges (treasuries, cash, gold, U.S. dollars), and came into today underweight equities with a bias towards holding defensive sectors. These hedges should help shield our portfolios from a good portion of the damage, and will allow us to focus on capitalizing on opportunities that may develop during a period of uncertainty. Our Dynamic Market and Quant Series models are always on alert and stand ready to act if sell disciplines built into our models trigger changes in the portfolios, based on price action.
There is much confusion about what this defection will ultimately mean for the global economy and markets, and we don’t pretend to have all of the answers to what this means in the short and long term. In coming days we will be sifting through an avalanche of research on this topic, and that will allow us to assess first, second, and third order effects that may play out as they work their way through the system. Most importantly for you, because we have proactively positioned portfolios defensively coming into today, we feel we are now in a very good position to look for opportunities that may develop as the initial confusion permeates through the markets.
One note regarding the magnitude of today’s short term reaction is that markets were simply not positioned for this outcome in the lead up to the vote last night. All week long, stocks rose on the belief that the UK would likely remain in the EU. Therefore, positioning got very one sided for the remaining camp, and today we are witnessing a sell off given that the vote did not go as anticipated. Time will tell if this storm will quickly pass or whether it will produce a series of shockwaves. Either way, we stand ready and willing to approach this event opportunistically and benefit from whatever comes to pass.
If you have any questions, please contact your Pinnacle Wealth Manager.
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