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Did The Brexit Benefit Or Hurt The FTSE 100?

07/09/2016 11:06

As a mother of two, my income is about more than some spending money and a roof over my head. I want to have something left to pass onto my children; enough capital to give them the life they so richly deserve and open up possibilities that I didn't have as a young woman. I think that's a goal shared by most mothers.

To achieve financial independence, I invest 10% of my income each month. So, when the economic and political winds shift, I pay close attention. During the month of June, if you followed the FTSE 100, or any other index for that matter, chances are that you heard quite a bit about the Brexit. Everyone was wondering if the vote was going to pass. Speculation ran high along with nerves. For the most part, everyone was predicting that the Brexit was going to be bad for the market; the FTSE 10 in particular. But was it?

Valuation Since Brexit's Passing

The best way to determine whether or not the vote was good or bad overall is to look at the price on the day of the vote and the movement since. On the day of the vote, the FTSE 100 closed at 6,338.10. By June 27th, the affects seemed to be clearly negative as the index fell to 5,982.20 by the close of the trading session. However, since then the index has been on an incredibly bullish run. In fact, today it is trading well above the 6,800 mark. All in all, if we're looking at the movement in the market, it seems like the Brexit really was a good thing overall... at least thus far.

This leaves us with a couple of big questions:

1. Why did the Brexit turn out to be such a good thing for the FTSE?
2. Can we expect the bullish market to continue?

There are few things I hate more than spin and political chest-beating, so this article is my effort to cut through the politics and provide a fact-based answer. After all, my daughters' inheritance is riding on my ability to rationally invest.

Why The Brexit Turned Out to Be a Good Thing

The truth is that the Brexit, in and of itself, wasn't a good thing for the index. The economy in the UK was struggling before the vote, and the passing of Brexit signaled to some investors and analysts that further stimulus would be needed to quell the market.

When the Brexit vote was cast, the effect on the UK economy was far larger than expected. As a result, investors quickly started to predict that the Bank of England would be forced to enact economic stimulus. Of course, stimulus from central banks has a tenancy to boost markets. Every investor wants to cash in on the wave caused by "free money".

Soon enough, the economic stimulus was announced, and it was far larger than anyone expected. First and foremost, the Bank of England reduced its target interest rate. However, that was expected. What wasn't expected was the billions upon billions of new currency that would be printed in order to buy bonds and ensure that the economic benefits of the policies trickled down to the consumer. At the end of the day, the Bank of England decided to go on a currency printing spree. All of this money will continue to flood the UK economy, leading to stronger sales for corporations and better growth for the FTSE 100.

2016-09-07-1473229335-5816757-BrexitEffect.png
Graph source: anyoption UK

Is The Growth Going to Last?

The concern I have is how long this inflated growth curve will continue. I don't want to risk my family's hard-earned money on a bubble. This is the million-dollar question, and really, nobody has the answer. However, I do like to make predictions based on the data that's available to me. So, I'm going to go out on a limb here and do just that. To me, the data suggests that we're going to see relatively mixed movement. For the short and medium term, the FTSE 100 is likely to continue moving upward as we continue to see money essentially flying off of printers and into banks, and corporations.

However, it's important to remember the dangers of using such a drastic stimulus package. When the Bank of England prints new money, it is devaluing the money that has already been printed. In the short run, this will lead to growth, but in the long run, it can lead to devastating economic declines if not tapered off properly, at the right time. The truth is that the stimulus packages that we've seen around the world recently are highly experimental and I fear that investors, and the average consumer will feel the pain associated with these experiments down the road.

What Do You Think?

Do you think the Brexit was good or bad for the FTSE 100? Join the discussion in the comments below! I'm curious to learn more about your family's investment strategies.

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