The Calm Days of Summer?

June 13, 2016

Summer is here and, for some of us, that means tranquil trips to the beach or lake. June has historically been seen as a quiet month for the markets too – but not this year. Two dates loom large on the calendar: June 15^th and June 23^rd.

The June meeting of the Federal Reserve takes place on Tuesday and Wednesday of this week. The most critical item on the agenda will be the discussion on whether to raise interest rates. As you know the last rate increase in December was the first in seven years. The following Thursday, June 23^rd, is the day when the British people will vote on whether to remain in the European Union. While we debate, watch and worry about a truly extraordinary Presidential election, the next two weeks could produce events that will roil the markets.

First let’s reflect on what might be announced by the Fed at the end of its meeting  on June 15^th. Earlier this year, economists felt it was almost a certainty that the Fed would be raising interest rates by this meeting.  However recent economic data, most notably last month’s low job creation numbers, has the market less sure about what the Fed will do. The Fed’s decision will not be taken lightly by the market. Investors are globally searching for safe places to park their capital following a long equity bull market. Global interest rates continue to fall, with the search for yield now beginning to migrate from sovereign debt to high grade corporate debt. The yield on the high grade corporate bond index closed at a new record low yield of 2.96% this week.

Across the “Pond”, polls suggest that the UK referendum on EU membership remains too close to call. There is some irony that this vote is taking place at all. From a six country alliance, forged by ghastly memories of WWII, cooperation in Europe has expanded to become the 28 member European Union of today. The EU has many achievements. It has facilitated trade, business, and commerce among the member countries, which now have a total population of 500 million people. Nineteen of the EU members, including France and the Germany, use a common currency (the Euro). Notably the EU easily outlasted the Soviet Union. To date, nobody has ever left. But many in the UK pine for independence from the Brussels-based EU bureaucracy, especially when it comes to immigration matters.  The latest polls show some momentum for the “Leave” camp, and the awkwardly named Brexit, but UK polls can be misleading as any disappointed Scottish independent will tell you.

So the market is facing uncertainty on a couple of decisions that will have global impact. The market seems to be expecting no change on either front, but we suggest that investors be cautious over the next two weeks.

Carl Gambrell

Carl Gambrell