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Clients and friends,

It is Sunday afternoon and the dust is still settling from the United Kingdom’s popular vote to exit the European Union (Brexit).  

Many are concerned about Friday’s global stock market drop.  It was far from a crash on Friday, but whenever you hear that the Dow Jones Industrial Average was down 600 points for the day, you know that all is not well.  

So what happened and what can we expect?

In a nutshell, world financial markets were blindsided by the stunning Brexit vote.  Major British polls and (perhaps more influential) betting parlors had predicted a “no” vote on Brexit.  In fact, the day ahead of the vote, the U.S. Standard & Poor’s 500 surged to its highest level since March.  So when the Brexit vote was finally tallied, the expectations were shattered and investors worldwide voted by pushing the “sell” button on stocks.

And no unpredictable event such as this goes without the barrage sensational media reporting and speculation all of which serves to further increase anxiety.

So let’s apply some perspective.  Despite all of Friday’s doom and gloom, year to date the S&P 500 is roughly where it began the year (actually down 0.19%).  When you add in 2016 S&P 500 dividends, the S&P is actually up a little bit.  This was not a financial event like the collapse of Lehman Brothers in 2008 and the ensuring financial crisis that ensued.

Markets and economies around the world will continue to be buffeted by the shock waves from Thursday’s Brexit vote.  Why? Because these are uncharted waters as no country has ever left the EU before.

U.S. stocks remain more insulated from global developments than any other major equity market, as American companies generate 70% of revenues domestically. That compares with 58% for Japanese companies, and 49% for Europe. U.S. corporate balance sheets are strong, interest rates are low, and the U.S. economy is on pace for a 2.5% expansion in the current quarter.

Over the long term, Brexit should have little direct impact on the U.S. economy. U.S. economic trends are heavily driven by the U.S. consumer (roughly 70% of GDP), which continues to benefit from tighter labor markets and rising income expectations that are little impacted by the vote in the U.K. While business activity has moderated some of late, the underlying trend there has remained solid.

Economic and political uncertainty is going to be the dominant theme in the next few weeks. Concurrently, volatility will be higher than usual at least through the Summer.

Additionally, the Brexit vote also means the Federal Reserve will most likely hold off raising interest rates until late this year or even into 2017.  Removing that bit of uncertainty from investors minds should offer some relief.

Now that Brexit has passed, I think it’s important to step back, and just watch how things play out.  The exit will probably take a few years to unfold.

So for now, “stay calm and carry on”.  In the meantime, I’ll start preparing for your mid-year reports.