Source: Road Traffic Signs
That’s what I thought when I saw that US stocks had almost totally recovered. The S&P 500 is now within 1% of its pre-Brexit level. UK stocks are actually higher than they were—spurred on by a weaker British Pound. To be sure, other European stock markets are lower—those in Germany, France, and Italy. To be sure, the Pound and Euro are still down. And interest rates around the world are a lot lower. In the US, the 10-year US Treasury yields 1.4%–down from 1.75% before the vote.
And there’s the rub. The broad market averages may not have changed much, but inside the markets things are shifting, adjusting to a new reality. Within the US stock market, electric utilities and phone companies are hitting new highs, while bank stocks are struggling. If interest rates are going to be lower for longer, then bank interest rate margins are going to suffer. But companies that pay stable dividends will do well. And if they can add squeeze a little growth out of our slow-growth economy, that’s even better.
That’s the problem with averages. There can be a lot going on inside that isn’t readily apparent. The most defensive sectors of the market are rallying while cyclical stocks are struggling. That says something about where we are in the economic cycle.
Economies and markets are always adjusting to new circumstances, brought on by social and financial and technological innovations. Everything flows; nothing stands still. You can’t step into the same river twice. The only constant is change.
Douglas R. Tengdin, CFA
Chief Investment Officer