From its origins in 1951, with the establishment of the European Coal & Steel Community, the European Union (EU) has grown to encompass 28 European countries and territories. From the Arctic reaches of Finland to the subtropical beaches of Cyprus, the EU stretches over 1.6 million sq. miles, and is home to 510 million people. A successful experiment in intergovernmental cooperation in many respects, the EU is predicated on the political and economic union of its member states, to varying degrees. What does this mean for those of us living on this side of the Atlantic? Perhaps two of the most recognizable instruments of the European integrative framework are the Schengen Area and the Eurozone.
 
Since its inception in 1995, Schengen Area member countries have adopted common visa and security policies. Passport requirements and border controls along their mutual borders have also been dismantled. This has resulted in the creation of a free movement zone within the Schengen Area. Third-country visitors to the Schengen Area must still submit to a border control agent and present valid travel documentation at their external point of entry, but can move freely once inside the Schengen Area. For an American tourist, this means that a trip from Lisbon to Warsaw is, for the most part, not encumbered by border guards and checkpoints. It is worth noting, however, that not all EU members are part of the Schengen Area. The United Kingdom, Ireland, Bulgaria, Croatia, Cyprus and Romania are currently outside of its scope. At the same time, various countries outside the EU are active participants, namely Switzerland, Norway, Iceland, Liechtenstein, Monaco, San Marino and the Vatican City.
 
In addition to the Schengen Area, the EU has also moved to a monetary union. The Eurozone was established in 1999, when the euro was first introduced as the common currency. Since then, the euro has grown in importance, despite recent setbacks precipitated by the global recession and the Greek debt crisis. Setting aside the combined economic clout of the entire Eurozone, three of the world’s largest economies (Germany, France and Italy) have adopted the euro as their currency. Additionally, Frankfurt and Paris continue to be major international financial centers, and the European Central Bank (the governing body for the Eurozone’s monetary policy) remains as one of the world’s most important central banks. Not surprisingly, the euro is the second most widely held international reserve currency. Additionally, multiple countries and territories around the world have aligned their currencies to the euro. Very much like the Schengen Area, however, the Eurozone is not analogous with the EU, as various EU members states have yet to adopt the euro: Sweden, Poland, the Czech Republic, Hungary, Croatia, Romania and Bulgaria. These countries have retained their national currencies, although their economies are intimately linked to the rest of the EU and the Eurozone. The UK and Denmark, on the other hand, have opted out of the union, while Andorra, Monaco, San Marino and the Vatican City have adopted the euro as their official currency.
 
The EU and its institutions may appear convoluted, but they reflect the complex nature inherent to all intergovernmental organizations. If anything, in an increasingly globalized world, American travelers and investors would be wise to recognize these nuances. 

Geovanny Vega

The citizens of Great Britain voted on June 23, 2016 to leave the European Union by a margin of 17,410,742 - 16,141,241.  Investors predicted Great Britain would remain a member of the European Union, and they predicted incorrectly.  The market's reaction in the period that followed is an interesting case study of short-term, erratic investor behavior, and another example supporting the buy-and-hold long-term investment approach.
 
The two days following the Brexit announcement, the S&P 500 lost 5%, the NASDAQ lost 6%, the Dow lost nearly 1,000 points, and foreign markets fared even worse (France's CAC fell 10%, Japan's Nikkei fell 8%).  Gold climbed from $1,256/oz. to $1,324/oz. and the 10 year U.S. Treasury Yield fell 16% (both are indications of investors' flight to safety).  Global market cap lost approximately $3,000,000,000,000 in those two days!  This represents the largest two day market event ever.  Prominent and respected economic figures were espousing dooms day-like predictions, with Alan Greenspan, a former Federal Reserve chairman, describing this as 'the worst period he could recall since being in public service,' and rumors began circulating that a recession bigger than 2008 was on its way.  Incredibly, this was all the result of one sovereign country's vote to leave a regional organization.
 
The markets, of course, did not crash, nor did we enter into another recessionary period.  In fact quite the opposite occurred.  U.S. markets rebounded strongly, with the three major market indexes reaching all-time highs on August 15, 2016; the Dow reaching 18,636, the S&P 500 closing at 2,190, and the NASDAQ closing at 5,262.  In foreign markets, the MSCI EAFE Index (a broad, foreign-equity index) climbed to $59.04 from a $52.63 post-Brexit low--a 12.18% increase.  Not only did markets shake off the unexpected Brexit vote, they surged past their pre-Brexit values to reach new performance benchmarks.
 
The massive loss in market value that occurred in the two days following Brexit is an excellent example of irrational investor behavior.  Stock prices should reflect the value of a slice of ownership of the underlying company, after adjusting for all relevant and public information.  In other words, investors will react to all available information and will buy and sell a stock until its price is at its fair value.  When new information becomes available, especially unexpected information, investors react by buying and selling and eventually driving the price of a security up or down accordingly.  With this premise in mind, one way to interpret the post-Brexit data is to conclude that investors believed that the negative consequences of Britain leaving the EU would reduce the value of global stocks by $3 trillion!  This is an amazing outcome considering that Britain's vote is without precedent, as is the process of a country withdrawing from the modern European Union. Investors simply had no knowledge about the actual ramifications of a country's exit from the EU, yet they were placing severe negative price pressure on global equities.  Clearly this was a gross overreaction to unexpected news, and subsequent market performance confirmed this.
 
What did occur in the days following June 23, 2016 was a buying opportunity.  A Warren Buffett quote used in a prior news article perfectly describes the immediate post-Brexit environment, "Be fearful when others are greedy and greedy when others are fearful."  Equities were 'on-sale' because of investors' severe overreaction to the vote result.  An investor who bought the S&P 500 on June 27 and sold on August 15 would have made over 9.4% in just under two months.  Of course, knowing the exact days to buy and sell (i.e. market timing) only works in hindsight, with the luxury of historical data.  The point is that whether an investor had cash ready to invest or was already invested in stocks, the few days following the vote was a great time to own equities.
 
Brexit was arguably the biggest unexpected market event in the last several years, with intense investor overreaction driving global stock markets $3 trillion lower.  The overreaction was not hard to spot, and the markets recovered strongly in the weeks following the vote.  The buy-and-hold long-term investment approach continues to prove successful.  Our clients' portfolios constructed pursuant to a long-term plan are more likely to endure the Brexit-like downturns, which occur in equity markets, while allowing the portfolio to hold those stocks as they reach their historic highs.  

Charles Holder