Economic Snapshot: Post-Brexit Metrics

I take a look at common economic indicators once a quarter or so publicly, usually at the end of each quarter. Now that the UK has voted to leave the EU – and the ensuing economic shock has hit – I thought it would be a good time to examine those indicators again. A couple of days in the market have let the dust settle a little. For reference, here’s where we were at the beginning of 2016.

Domestic Markets

DJIA

We begin with the Dow Jones industrial average, which has taken a 900 point haircut.

djia.png

Even though the index is down significantly, it’s still significantly above where it was earlier this year.

S&P 500

We see similar with the S&P 500:

sandp500.png

The past few days have not been kind, but in the bigger picture, there’s still no reason for panic.

NASDAQ

We see a sharper impact to the NASDAQ:

nasdaq.png

This is more telling; the Dow Jones and S&P 500 tend to be perspectives on Big Business, whereas the NASDAQ is more inclusive of smaller publicly-traded companies. Thus, we see the Brexit impact magnified more.

CBOE VIX

The CBOE Volatility Index, or VIX, shows the panic well:

cboevix.png

Instead of actual prices, the VIX shows how much volatility is in the market. The more uncertainty, the higher the VIX. While high, the VIX is nowhere near where it was during the 2007-2008 Great Recession.

Lending

30 Day LIBOR

We look next at LIBOR, the London Interbank Offering Rate. This is the rate which banks charge each other to borrow or lend money for a 30 day period. The higher LIBOR is, the more uncertain banks are of the immediate financial future, because they’d prefer to hold onto cash.

1molibor.png

30 Day LIBOR is higher than average, but hasn’t spiked during the Brexit events as we might have expected.

90 Day LIBOR

We see a similar pattern in 90 Day LIBOR, the rate banks charge each other to borrow or lend money for a 90 day period:

3molibor.png

The overall conclusion we can draw from interbank lending is that while there’s uncertainty, it’s not the crippling influence we’ve seen in the past.

International Markets

BDI

One of the true bellwethers, the Baltic Dry Index is the price of shipping goods via container ship.

bdiy.png

We see that BDI barely moved in the wake of Brexit. This is an indicator we should keep an eye on in the weeks and months to come, but it’s a good sign that companies didn’t immediately cancel plans to ship things.

Gold

Where we see market moves is in the panic zone: gold. Gold is known for high volatility during uncertain times, and it does not disappoint:

gold.png

Gold spiked to over $1,322 per ounce. Given current economic conditions, once the panic wears off, expect it to return to recent levels, unless the global financial system endures more shocks.

Conclusions

We see, in the early days, lots of panic. However, much of the panic is unwarranted when we look at the bigger picture of where markets were in earlier 2016. The fundamental underpinnings are still strong.

Should Brexit continue on – and there’s debate about that – then we can expect shocks to the market down the road, once the separate is truly underway. However, as of right now, only panic is fueling major market moves. Your best bet is to wait a little longer to see what else emerges. There may be legitimate cause for concern, but we have to wait until the dust from the panic cloud clears to truly see what our risk exposure is.


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On Brexit, Part 1: Measure to Mitigate Uncertainty

The UK referendum to exit the European Union creates a vast cloud of the worst thing for business: uncertainty. Article 50 of the EU constitution, the lawful secession of a member state, has never been exercised until now.

How do business leaders and marketers consider this turn of events?

The short answer: too soon to tell.

The longer answer: rely, rely, rely on your data. Rely on your analytics. Rely on measurement. Measure what’s critical to your business frequently. If you’re concerned about exposure to this (or any other international event), you should be checking your data much more frequently to detect changes as quickly as possible.

brexitus.png

Business (and marketing) is like driving. Right now, we’re driving in stormy weather. You must have both hands on the wheel, foot ready to react to the slightest change in traffic or slipperiness of the road. Your eyes must be solely on the road, focused, attentive.

The equivalent of focusing only on the road in stormy weather is checking your data, performing frequent analysis, and making adjustments quickly.

All storms pass eventually. This will, too. For now, follow the martial arts credo taught by my teacher Stephen K. Hayes: Awake! Aware! Alert! Alive!


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Economic Conditions Snapshot for Q2

Remember how at the beginning of the first quarter, some economic advisors were shouting that the sky was falling, sell everything, and run for the hills? How are things shaping up? Was that warning warranted? Let’s take a look at the economic conditions of the first quarter and how the second quarter is shaping up.

One of the most important lessons about economics is to do your own work. Download the data, make your own charts, run your own analysis. Don’t rely solely on the words of pundits, especially if they have a vested economic interest of their own. Market bears tend to be resellers for gold; market bulls tend to be resellers for equities.

Let’s begin our review with the 1 year view of the Dow Jones Industrial Average:

Dow_Jones_Industrial_Average©_-_FRED_-_St__Louis_Fed.jpg

After a shaky start to Q4 and a very sharp selloff at the beginning of Q1, we appear to have regained territory. No cause for alarm here, and if you went contrarian and bought in January, chances are you’re felling really good right now. In the big picture, we’re still plateaued, but for now, things look reasonably good.

We see an identical bounce in the S&P 500:

S_P_500©_-_FRED_-_St__Louis_Fed.jpg

And the NASDAQ:

NASDAQ_Composite_Index©_-_FRED_-_St__Louis_Fed.jpg

Let’s check market volatility, via the Chicago Board Options Exchange VIX. The VIX measures how volatile the market is; the more volatile, the more unsettled investors feel.

CBOE_Volatility_Index__VIX©_-_FRED_-_St__Louis_Fed.jpg

We see the complementary pattern to the major indices above; while volatility is above mid-2015 levels, it’s significantly down from Q4 and early Q1. Overall, the stock markets appear to be in good shape.

Let’s turn our attention to the banking system. We check 30 and 90 day LIBOR, the London InterBank Offering Rate. The more risk in the economy, the higher LIBOR is. The higher LIBOR is, the less banks trust each other and the more they want to hold onto cash. Unlike the American stock markets, LIBOR takes into account global instability.

1-Month_London_Interbank_Offered_Rate__LIBOR___based_on_U_S__Dollar©_-_FRED_-_St__Louis_Fed.jpg

30 day LIBOR shot up at the end of Q4 and hasn’t come back down since, almost tripling. The same holds true for 90 day LIBOR:

3-Month_London_Interbank_Offered_Rate__LIBOR___based_on_U_S__Dollar©_-_FRED_-_St__Louis_Fed.jpg

Banks are feeling cautious. These levels aren’t nearly as high as during the Great Recession, but the rapid climb and steady plateau indicates a need for more safety on the part of banks lending cash to each other.

Let’s look at mortgages. How does the 30 year fixed rate mortgage rate look?

30-Year_Conventional_Mortgage_Rate©_-_FRED_-_St__Louis_Fed.jpg

Contrary to market predictions, interest rates fell again significantly, putting them down at near historic lows.

Have jobs recovered?

Total_unemployed__plus_all_marginally_attached_workers_plus_total_employed_part_time_for_economic_reasons_-_FRED_-_St__Louis_Fed.jpg

Despite the dire words of politicians on the campaign trail (everyone has an agenda and something to sell you), total underemployment is down to almost pre-Great Recession levels. This is all unemployed people, plus marginally attached workers (day labor, etc.) plus people working part time who used to work full time. The jobs number is a very strong number.

So we’ve got a bit of a mystery. The American economy as a whole appears to be stable and strong, with affordable mortgages, strong employment, and rising stock markets. Why are banks reluctant to part with cash?

The answer is: not because of America. Let’s look overseas at the MSCI Emerging Markets index, an aggregated index of the economies of 23 nations:

Featured_index_-_Emerging_markets_-_MSCI_q2.jpg

Here we see the same bounce as in the American markets (owing to the American economy’s outsized influence on the global economy). While rebounding, growth is still low.

The Baltic Dry Index also remains at near historic lows:

BDIY_Quote_-_Baltic_Dry_Index_-_Bloomberg_Markets_q2.jpg

BDI is the going cost of ocean-borne cargo container shipping rates. Unlike other indicators, it’s lagging; you don’t speculatively buy lots of cargo space you don’t need. Above, we see that companies are still not buying up shipping space; prices remain low.

How does everyone’s favorite shiny commodity, gold, look?

Gold_Fixing_Price_3_00_P_M___London_time__in_London_Bullion_Market__based_in_U_S__Dollars_-_FRED_-_St__Louis_Fed.jpg

Again, we see a flight to quality. Globally, investment in gold has pushed prices up significantly in the first quarter.

We know something is dampening the global economy. What? The OECD’s global consumer confidence levels finally tell the tale:

Leading_indicators_-_Consumer_confidence_index__CCI__-_OECD_Data_q2.jpg

While the OECD as a whole is down slightly in consumer confidence, what’s brought down the rest of the world is China. The People’s Republic of China is applying significant drag to the global economy.

How does this affect us?

For one thing, almost every American presidential candidate is making a lot of noise about the dire state of the American economy. The overall American economy is quite healthy, healthier than the rest of the planet.

For marketers, if you don’t have much global exposure to risk, the year appears to be turning around. Going into the second quarter, stock prices are rising, volatility is low, prices are relatively cheap, and consumer confidence in America is high.

B2C will see benefit first; consumer spending has to work its way up the supply chain before B2B sees the impact. That said, there is just cause for optimism for both B2B and B2C marketers.

Don’t buy into the self-serving lies of politicians and pundits with something to sell you. Right now, the macro economy looks fairly good.

Disclosure: I am invested in several funds as part of retirement planning, but do not track or purchase individual equities. I receive no compensation from any organization, category, or vendor in this post.


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