Brexit Panic Not Over

Kevin Cook here for Reity...

Months before UK citizens voted fatefully to drop out of the EU last week, I believed the S&P 500 had little justification for trading at 2100 and flirting with potential new highs. My arguments were built around the Earnings Recession, valuations, and a sluggish economy. I predicted that a "summer of shocks" should correct the index back to 1950 soon enough.

Now I'm examining the potential to test even lower as the global financial impacts of Brexit are being felt and forecast. Europe has a bloody mess to fix and the uncertainty is showing up not just in US Financial stocks, but in those economically-sensitive sectors like Energy, Materials, and Industrials, down 3.2%, 3.4%, and 2.35% respectively on Monday.

Should European politics affect US markets so much?

Maybe not. But big shifts in global economic and trade structures can weigh on already-weak growth that is ultra-dependent on very low interest rates. And the thinking from the world's largest hedge fund, Bridgewater, is that the fun could just be starting for the greatest economic experiment in history...

"The UK voting to leave the EU is a clear warning signal that the rise in populist/separatist positions has reached levels that they can change the status quo significantly," said Bridgewater's co-CIO Greg Jensen.

"The global economy and financial system relies on the euro and the ECB, and the continued existence of the euro depends on the cooperation of the Eurozone countries. If the UK leaving the EU caused a 10% swing, what would a set of political events that raised questions about the future functioning of the ECB cause?"

Bottom line: For long-term investing, there are good arguments for deploying capital in great companies at these levels. But in the short run, I don't think we've seen the summer lows yet.

Best,

Kevin Cook

Senior Stock Strategist, Zacks Investment Research

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