If you’ve read or watched any news since last night, I’m sure you have heard that the “Leave” campaign has won the UK’s referendum on leaving the European Union. Although the referendum was extremely close and non-binding, it kickstarts a series of events and decisions. Prime Minister Cameron has already announced that he will step down, there may or may not be snap elections, Cameron or his successor must notify the EU of their intent to withdraw membership, and then a 2 year negotiation period begins (although it could last many more years). The who and when of the aforementioned events is unknown, not to mention that there is debate about what type of arrangement the UK will try to negotiate as well as their EU counterparts. The two important points to know are that the UK is still in the EU (and will be for at least a couple years) and not much else is known (although there is A LOT of speculating).
Financial markets wasted no time in rendering judgement. As election results poured in last night, markets began a massive selloff (although they’re mostly well off their lows from last night). No decline has been as massive as the decline in the British pound, relative to the US dollar. At one point overnight, it was down over 10% to $1.32, representing both its largest decline ever and its lowest level in decades. It has now bounced back to $1.36, which is still lower than any time in the past several decades.
However, consider that the pound was at $1.38 in February. Similarly, the S&P 500 dropped to levels not seen since…May. Emerging markets equity indices are now at levels from 8 days ago. Government bonds have rallied tremendously, but are at about the same level as a week ago. In short, markets are going up and down as they always do; the only difference is that declines of this velocity typically only occur every few years (2015, 2011, 2008, and so on). The referendum is not likely to be inconsequential and there will be ramifications for the markets, but the future is not known and we manage portfolios to weather a range of potential futures.
As we often counsel, by the time events occur and markets move, it is too late to make changes in your portfolio. We believe the best strategy is to manage risk prudently, so that adverse events do not destroy your portfolio. We recommend calibrating your portfolio allocation to your goals, needs, and tolerance for volatility.  When markets become overly fearful or ebullient, then we will be more aggressive or more cautious. We have been trending more cautious, but will keep our eyes open to opportunity in the fallout of the referendum results.
Looking ahead, we are cognizant of the heightened risks of an EU breakup and the market impact. As mentioned in previous letters, we have been becoming more defensive lately and will likely continue to do so. However, we are already seeing areas of markets that are frozen or are being sold indiscriminately. These are areas that we will monitor to see if we can pick-up some opportunities at fire sale prices. Again, we feel well positioned for any volatility that may come, but please do not hesitate to reach out with any specific questions or concerns.