As of the close on Friday, June 24th the S&P 500 index was down about -3.6%. The market was up about 1.3% yesterday, so we're giving back that gain and are down about another 2.3% on top of it. We do not believe this is a crisis or crash by any stretch of the imagination, despite any breathless headlines to the contrary.
The UK market finished the day down a bit more than 3.2%, less than most of the other European markets. The fear among investors may be that this is the start of the splintering of the European Union (EU) “experiment” and will increase pressure on other nationalistic-minded voters to seek departure. The UK was widely seen as a strong member of the union, so its departure appears to leave the EU more vulnerable.
Both we and the market were surprised by the vote’s outcome. While polls remained close, betting sites in the UK shifted materially to the “remain” side in recent days, particularly yesterday, which likely explains the strength of the pound and the UK market yesterday. Some of the rationale for believing the “remain” vote would prevail was that real money betting is more likely to be representative of reality, versus polls which can be less reliable.
As a result of developments earlier in the week and the seeming shift toward a “remain” vote, we slightly trimmed our risk tools but kept some exposure in a gold ETF and in a double inverse S&P ETF. We believe this positioning, along with our slightly elevated cash position and natural hedging, which includes more typically defensive securities and exchange stocks, should help mitigate some of the market pressure on the portfolio.
As of this writing, financials have been hit the hardest. We do not have any exposure to truly global financials, having sold an investment bank stock in mid-June, and believe our exposure to regional banks should be relatively insulated from any global financial sector shocks.
The bigger question for us surrounds how the markets will trade in the coming weeks and months given this new dose of uncertainty injected into the system. In our view, this uncertainty could incrementally reduce GDP growth and, at least in the near-term, derail the shift to value trend we anticipated, which was predicated upon an improving GDP growth outlook.
Overall, this event gives us reason to underscore the domestic focus in our portfolio. As events unfold in Europe, we believe that any slowing there would likely be incrementally negative for U.S. based exporters. While the dollar is not breaking out to new highs and remains in the middle of its recent range relative to other currencies, today’s dollar strength is directionally more negative for exporters.
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.