Brexit has come and gone. After plunging precariously on the news, global stock markets quickly recovered all they lost following the announcement that the United Kingdom had voted to leave the European Union. So was all the hubbub much ado about nothing, or is there more to come? The future is unknowable, but the past may offer some clues.
Remember a brokerage firm by the name of Bear Stearns just prior to the 2008 housing crisis? Bear went bankrupt well before the more infamous bankruptcy of Lehman Brothers set in motion a cascade of events that eventually led to the biggest blowup in stocks since the Great Depression.
You don’t hear much about Bear Stearns anymore. That’s because the Fed arranged for it to be snapped up by JPMorgan Chase before any real damage to market confidence was done. But the Bear bankruptcy was important because, like a canary in a coal mine, it signaled something wasn’t right in the banking system.
Is the Brexit vote in the UK today’s Bear Stearns bankruptcy? With the rise of Donald Trump and ascendant nationalist political parties throughout nearly all Europe, it sure seems like it. Brexit is just one of many signs that the political reality is changing. Gone is the one-world optimism that followed the fall of the Berlin wall. Globalization is now the enemy for many.
Growing numbers of neglected, angry middle-class wage earners across the globe are clamoring to “get their countries back.” Pitchforks are being sharpened here and in Europe as voters revolt against the status quo. Protective walls, both economic and literal, are growing more popular on both continents. Stocks do not like walls – or anything that hampers commerce. Will today’s Brexit warning be followed by tomorrow’s “Lehman moment”? Investors need be ready now.
The Argument for Diversification
We’ve featured the chart below before. It shows the performance of managed futures (the lighter blue line), domestic stocks (the orange line), international stocks (the dark blue line) and ten-year treasuries (the green line). The circled areas indicate previous periods of market crisis. Past performance may not be indicative of future results, but this chart does tell a story.
Professionally-managed futures run by Commodity Trading Advisors (CTAs) are completely uncorrelated with both stocks and bonds and have a history of doing well in times of crisis. That’s why they are popular with university endowments, hedge funds and institutional investors.