A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)
The two-day panic selloff in the global stock markets that followed the United Kingdom vote to exit the European Union on Thursday, June 23 was widely attributed to the resulting uncertainty about the future of the Eurozone. So a week removed from the vote, investors are asking why did the markets recover so quickly from Tuesday through Friday of last week? This type of knee-jerk reaction is not new, as we have seen the stock market react to panic and uncertainty in similar fashion in the past. Nonetheless, the rebound in the S&P 500 has been extraordinary. It was down 2.1% year to date at the end of last Monday, and now it is up 2.9% and only 1.3% below its record high of last year (See Graph I below). The rebound was led by the cyclical sectors of the S&P 500, while the Telecom Services, and Utilities sectors were unaffected and even went vertical to reach all-time record highs.
The vote has increased uncertainty about the UK. Will Scotland now vote to leave the UK? Prime Minister Nicola Sturgeon, announced that they are considering a new referendum on independence. Who will replace Prime Minister David Cameron now that former mayor of London, Boris Johnson, dropped out of the race? The two top contenders for the leadership spot both have said that they are in no rush to trigger divorce proceedings with the EU, which could take years. All this uncertainty seems to have increased the likelihood of further monetary stimulus from the Bank of England, the European Central Bank and even the Bank of Japan. Even the U.S. Federal Reserve seems to be shying away from normalizing monetary policy, with no additional increases to the Federal Funds Rate looking ever more likely than another increase. That certainly would explain why the US 10-year Treasury bond yield has dropped to a record low in recent days (See Graph II below). This is putting the correlation between U.S. stocks and Treasury bonds into question, something that we will continue to watch closely.
by Myrna Rivera, CIMA®
Founder & Chief Executive Officer
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