
A new lease on life? Usually you have a set date when a lease ends, but in the UK’s case it depends. This week the European Union unanimously agreed to extend the March 29th deadline for Brexit looming only a week away to give the country a little more time to come to an agreement. How much time depends on the UK itself. If Prime Minister May can get Parliament to agree to the deal that has already been approved by the EU, then they can have until May 22nd to finalize the details. If they cannot, they have until April 12th to have an alternate plan in place. Therefore next week is a critical week for Parliament who must come to grips with political realities and decide between four options – 1) Approve the deal Parliament has rejected twice already and have until May 22nd, 2) Come up with another deal by April 12th, 3) Go with a no-deal exit on April 12th, or 4) stop the Brexit process altogether. The “Stay” camp is still clinging to hope as a petition to remain within the European Union has received 4 million signatures.
The UK is in a tough spot. Its economy has meaningful reliance on attracting foreign capital from and exporting services to their trading partners. The political uncertainty is making it a less attractive place to do business, not to mention that the economy as a whole is slowing while interest rates remain relatively low and the GBP relatively weak (thus not much room to stimulate). Unfortunately, there is no magic solution that will bring peace to all sides of the debate. It will require compromise; a precious commodity in today’s climate. Time is running out to find some.
Meanwhile, the Fed meeting this week sought to reinforce its supportive policy stance. Having changed course in January with the “pause” in the rate hiking cycle, it doubled down in its communication on Wednesday by lowering their projections for future rate hikes (called the dot plot) and cutting 2019 growth expectation to 2.1% (from 2.3%). Chairman Powell sought to reassure investors that the Fed is practical and wants to support growth (stated in the context of their inflation target). Of course, how you see this news depends on your perspective. On Thursday, the equity markets shot higher as it felt the Fed support of bullish behavior. By Friday, the bond market had discounted the slower growth and lower inflation into a lower 10-year Treasury yield which caused it to dip below the yield on the 3-month T-bill. Fearing the inversion as a bell-ringing for the cycle end, stocks gave back all of the previous day’s gains. Investing over a long-term horizon, we recognize the “clock” that creates anxiety for others is our friend. Volatility that is created as investors fear the end of one cycle and the start of the next creates opportunity for re-balancing and adding to investments at better valuations. Looking past a given calendar quarter or year, real wealth creation happens as you stop “renting assets” quarter-to-quarter and compound ownership over time.