EMAILED: 6/24/2016 11:20AM Central:

Recognizing markets move quickly and that can make opinions change, here are some of Northlake’s thoughts this morning after Leave wins the UK referendum:

Uncertainty.  It is an old adage but the fact is that Wall Street dislikes it.  Brexit creates a lot of uncertainty as there really has never been anything like it.  Thus, the bias for now in terms of investment strategy should be increased caution.  However, panic is probably not the way to act as Brexit is a long process with the possibility that it will not impact the economy and the stability of the global financial system nearly as much as the bearish view predicts.

Brexit is not even effective yet.  All of the legal and technical rules that govern the EU and the UK’s interaction with the EU (and the rest of the world) remain in place.  This gives time for negotiations to smooth what will be a tricky transition.  Global central banks and governments also have some capability to keep the financial system stable.  The UK also has the ability to act since it has its own currency and independent central bank. These things suggest panic is not required.

Nevertheless, the uncertainties are enormous.  The EU is likely to drive a hard bargain when it negotiates with the UK if for no other reason that it does not want to reward the UK for leaving by letting things continue largely as is.  Anti-EU sentiment is high in many European countries and political parties that dislike the EU have been gaining power in recent elections.  If the EU goes easy on the UK, then maybe Finland, the Netherlands, or even France may have a referendum on leaving.  And leaving for any country that uses the euro is a lot more complicated than for the UK.  There is no longer a French franc, for example.

Uncertainty also can cause businesses and consumers around the globe to slow their plans to spend and invest.  An obvious response to Brexit is a rally in the dollar.  That hurts US exporters and multinationals.  It also pressures energy and commodity prices and emerging market currencies.  Those are the issues that caused the market to get off to a horrible start in January and February.

We are mostly trying to help you understand what the market is thinking and what we are thinking as we consider investment strategy after what is almost certainly a very important event.  The bottom line for Northlake from a strategy standpoint is that we do not want to panic but we do want take a little more cautious approach looking out over the next several months.  The global and U.S. economies and markets were in decent but not great shape going into the Brexit vote.  We can’t deny that more uncertainty and risk exists today.  That spells more caution as it relates to investment strategy.

We will end with another adage.  Time heals all.  On Wall Street that is because time reduces risk.  Most clients and investors have time horizons that mitigate short-term risk.  If your time horizon is beyond days, weeks, or months, it could be painful at times but as is usually the case when Wall Street hits a rough patch, it makes sense to wait it out and stay the course.