Financial mavens and governments immediately went to work Monday morning on understanding the aftermath of the UK's choice of the Brexit option.
Obviously this is a shock,said Jurrien Timmer,head of Global Macro at Fidelity Investments in Boston.The UK economy needs to adjust;the stock market and banks need to deal with this new reality.It's not surprising the financial sector is taking the brunt of the hit here.Somebody threw a bunch of sand into the gears.It's a period of reassessing where the growth is,how trade pacts and other agreements are going to be rewritten.*
The S&P 500 has been stuck on 1800-2100 for about a year-and-a-half.Now we have a negative catalyst that I think will lead to revaluation of US and world equities.We may see some form of stagflation,which is really more consistent with a 15x multiple.It's pretty orderly;it's just the market needs to rerate based on a new fundamental.Bascally it depends on how systemic a Brexit is.For the US investor,it's somewhat systemic.I think some degree of rerating is in order.We're a somewhat closed economy.The 15x multiple will lead to basically the lower edge of the range,but no farther.*
The Lehman moment was a liquidity crisis,a funding crisis.With central bank policy over-accommodative here,that's not going to be an issue.I don't see it necessarily as a crisis,unless the euro comes under attack,and it's too early to see that.If the Fed moves to the side,that's definitely an offset.I do think we're going to go into fiscal stimulus in the UK.The UK government could basically fund pretty aggressive stimulus.Even without a shock,some US focus on fiscal stimulus is likely in the election season.*
If we're moving into a mild stagflation environment,we could see less growth with more inflation,so some inflation-protected investing would be in order,Mr.Timmer advised.*
Responding to the Brexit vote,S&P lowered the UK's credit rating from AAA to AA with a negative outlook.*
Investors will be looking into Treasury Inflation-Protected Securities,or TIPS,a type of government bond suitable for buffering portfolios in a stagflation environment.The TIPS bonds' principal is indexed to the Consumer Price Index and rises and falls accordingly;while the TIPS bonds' coupon rate remains steady,yielding more when multiplied by the rising CPI in inflationary conditions. *
iShares TIPS Bond ETF (TIP)