Market Commentary: Brexit! – 6/24/16

Global equity markets crashed Friday morning in response to the unexpected exit vote from the European Union (EU) by the United Kingdom (UK). This took the markets by complete surprise, in contrast to the sample polling conducted prior to the vote. Global bond yields fell sharply as investors sought the safe haven of bonds. No one knows for certain how this UK vote to leave the EU will affect the global economy long term, but the fear is that other European Union countries such as Germany and Italy will also want to leave the EU and this is not good for the global economy.

This uncertainty is the enemy of stocks but the friend of bonds and we could see more volatility and lower interest rates over the next several weeks as this exit vote plays out.

We continue to remain biased toward locking in interest rates for a few reasons:

1. Many lenders are resisting lowering interest rates as bank margins are already severely compressed.
2. It is too hard to time the interest rate market with so many complex market moving events.
3. We know the Fed would like to raise interest rates even though they cannot do so at the moment.

The Fed has used most of its monetary policy tools to stoke the economy with tepid results. Increasing interest rates will provide the Fed more ammunition to combat the next recession.