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The Brexit vote is in. The lasting effects are not. The issue is what happens from here.
? It may take up to 2 years for Britain to officially leave the EU.
? What will the treaties look like on trade between Britain and EU and how does that affect the level of commerce (inside Europe and internationally).
? Scotland voted strongly to remain. What if they now have an independence movement of their own to leave Britain yet still be part of EU?
? Now that the door is open, what other nations may leave the EU?
All of these uncertainties will linger in the market for quite some time. In the end, it may have massive disruptive effects on global trade or virtually none. But it is the uncertainty of that outcome which may bind up the market.
The key for investors going forward is to see the changes in economic data, especially sentiment which drives decision making. If things take a notable turn south, then it will ripple through the stock market and cycle back into further downside in economic data. This would mean the beginning of the vicious cycle towards a potential bear market.
Just as plausible is that investors quickly tire of the Brexit narrative...like the "Boy Who Cried Wolf". If people turn a blind eye to the situation (as they did with Greek debt, as they do every day with slowing China data), then it is back to business as usual which would be positive for economic data and bullish for the stock market.
Indeed it is tricky. Which gets us back to the notion that all moves between 2000 and 2135 are meaningless noise. It is the breakout above or below that range which will show the conviction of investors. It is that move which investors should actively align their portfolios with as that trend will likely be in place for a good long while.
In the meantime investors should consider that any equity exposure should be US centric to decrease risk.
Best,
Steve Reitmeister
Executive Vice President, Zacks Investment Research
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