Stock markets moves tend to take the ‘path of least resistance,’ which for most investors tends to be the ‘path of most pain’ as it is the direction where the fewest investors are positioned.   That was certainly the case for the rally from the market lows in early February of this year.   An overwhelming consensus of bearish opinions about the outlook had most investors sitting on the sidelines with high cash levels.  Hedge funds were even more aggressive, with record short positions.   The logic for that positioning was straight forward.  Corporate profits were falling, valuations were the highest in a decade, the aggressive ‘zero’ then ‘negative interest-rate’ policies of the global central bankers had forced money into financial assets just as global growth was once again heading lower.  In June the U.S. reported the worst hiring since September 2010.  But, despite all of this, stocks continued to climb the proverbial ‘wall of worry’ that pushed the S&P500 Index closer to a record than any time since last July.  That all changed on June 23rd when the good people of Great Britain completely surprised the consensus view and voted 52-48% in favour of leaving the European Economic Union (EU).   Stocks quickly sold off 5% in the U.S. and over 8% in Europe and Japan, with bank stocks absorbing the brunt of the selling and some major European banks dropping over 20% in two days.   The ‘TINA’ (There Is No Alternative) mantra that had kept stocks rising for the prior four months was nowhere to be found as cash suddenly looked like quite an attractive alternative.  Once again stocks had confounded the experts!

But the panic was short-lived.  After heavy selling on the Friday and Monday ‘post-Brexit,’ the market reversed course Tuesday, as further reflection allowed investors to revise their view of Brexit’s implications to “Let’s wait and see” from “Let’s dump stocks.”  Then the central bankers came to the rescue once again as the Bank of England signalled that further monetary stimulus is on the way, and there were hints that the European Central Bank would follow suit.  Brexit also vindicated the U.S. Federal Reserve’s decision in the prior week not to increase interest rates and, in the minds of investors, put rate hikes on hold, perhaps until 2017.

While we were positioned for a market decline ‘post-Brexit’, our view had been that the Brits would vote in favour of staying in the EU (polls indicated such an outcome and voters generally tend to get the ‘shaky pencil’ syndrome in such a situation and vote in favour of the status quo) but that stocks would fall on the ‘buy on rumour, sell on news’ pattern.  Nonetheless, the selling, while aggressive, seemed to lack ‘conviction.’  While stocks declined on Monday, the VIX, or volatility index, fell as well, suggesting that investors were clearly not panicking.  We took this as a signal to begin adding to stocks again and to cover the negative ‘short’ positions in our Hedge Fund.  High trading volume characterized the tumultuous following week.  At the lows on Monday, the U.S. market had fallen nearly 6% before rebounding roughly the same amount.  But we should be wary of this counter-trend bounce as well?   Typically, a rally such as this, lead by classic defensive sectors isn’t bullish.  Telecoms and utilities are both up over 20% this year while, in Canada, gold stocks have been responsible for over 40% of the gains for the S&P/TSX Composite Index, which lead all major markets in the first half of the year with a gain of 8.3%.

While the month of June ended up being a ‘wild ride to nowhere’ for Canadian and U.S. stocks, there was weakness elsewhere as Japan’s Nikkei 225 fell 8.7%, Paris’ CAC 40 lost 6.4%’ and Germany’s DAX Index dropped 6.3%.  Oddly enough, Britain’s FTSE 100 Index finished 3.7% higher on the month despite the Brexit vote while China’s CSI 300 Index continued to dance to its own tune, gaining 2.8% in June, but falling 15.5% so far in 2016.

World markets - performance as of June 30 2016

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