Situation Analysis: A Brexit Update

After the United Kingdom (UK) voted to leave the European Union (EU), the global markets shifted to a “risk-off,” with global stocks, the British pound, and the euro all declining while the U.S. dollar, gold, and high-quality U.S. bonds rallied. The market decline reflects the surprising nature of the vote, since many market watchers expected the vote to be in favor or “remain.” We view the market reaction last week to be a response to the surprising outcome of the Brexit vote and the significant uncertainties it represents, rather than a negative statement concerning economic fundamentals or a sense that a major recession is now likely.