Just as we thought that the stock market was heading toward that proverbial “summer rally,” the British decided to exit the EU in a close vote that sent global markets reeling. It was far from a crash on Friday, but whenever you hear that the Dow was down 600 points for the day, you know that all is not well. It will be interesting to see how the aftermath of the British vote plays out next week, especially since the election results were surprising to the conventional wisdom and political elites that were supporting a “no” vote on the Brexit. While the day’s selling was fairly calm, the Volatility Index (VIX) did rise above 26, before pulling back below that level at the close.
Going back to King Henry the 8th in England, the British have always been proud of their independence from the European Continent in both political and geographic ways. Some British leaders from long ago have even said that if God had wanted Britain to be part of the Continent, then God would not have put the Brits on their own private island, away from Europe. This mentality may have played into Thursday’s vote when the people decided by a small margin to disassociate themselves from the European Union.
Brits said Thursday that they were tired of the experiment in “uniting” a gaggle of countries that were never united for the past 2,000 years. It is one thing if you are the United States of America, with a rough history of growing out of nothing into a country of states. Yes, we had a Civil War, and ongoing divisions to this day, but the U.S. is still a country that started from scratch. It is another thing to have whole counties with very different histories to think that they will get along as well as people from Nebraska and Alabama do in the U.S. (except at a college football game!).
The U.S. is different, though, and it is sort of amazing that we still get along relatively well. Europe has had hundreds of wars for 1,000-plus years (the Forty Years’ War and the Hundred Years’ War come to mind!), so thinking that you could put together a working relationship between these diverse nations was optimistic at best, and sort of Soviet at worst. This grand experiment that the UK’s independent party leader Nigel Farage called a failure from the start has finally been given a big thumbs-down. Farage made it clear that the Brits have spoken loudly, and they do not want to be ruled by the bureaucrats in Brussels any longer.
It will be interesting to see if the current market downturn gathers steam. Selling often creates more selling, and because Thursday’s relatively close win for the “Brexit” was a surprise, we could see increased volatility in the days and weeks ahead. The big worry for Brussels, though, is that other EU countries might say that they have had enough too. Concerns about a “Domino Effect” are in the spotlight right now. Get ready for a rough and tumble summer, and with Hillary Clinton and Donald Trump squaring off in November, it should provide a lot of political and investor excitement.
In U.S. economic news, we saw consumer sentiment fall to 93.5 from last month’s 94.7, which was below the 94.0 level that economists had expected. This number shows that consumers are still feeling shaky, and this number is before the Brexit results we saw this past week. That said, the Gorilla wishes each and all a relaxing June weekend. The Fourth of July holiday is on the way, and that should provide a nice, three-day weekend away from whatever happens in global financial markets next week. We will be back in action on Monday, so stay tuned as this new challenge of the Brexit unfolds next week.
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