The stock market was up modestly in the second quarter. After being flat into late May, equities rallied into mid-June following a weak jobs report which caused the Fed to pause once more on raising rates. Prices fell again near month end on the surprise vote of the United Kingdom (“UK”) referendum to leave the European Union (“EU”), only to rally in the last week as investors came to realize that their first impulse was an overreaction. International stocks didn’t rally as much, because the vote introduces more uncertainty for non-U.S. economies, helping to extend their weak performance over the last several years. And that uncertainty pushed investors back to the perceived safety of bonds around the world helping lift their returns yet again.

The outcome of the UK referendum was both surprising and concerning. No one expected the “Leave” side to win. And what does the vote mean for the future of the EU. The timing and details of any separation agreement remain uncertain, subject to a great deal of political maneuvering, and the greatest effects will be long-term in nature. Nevertheless, near-term concerns are still on the table. Will this force the UK into a recession? Does the EU, already growing at a subpar rate, slow even more? And how will that affect the U.S.? In any event, odds have risen significantly that central banks will provide additional monetary stimulus to offset any negative effects.

Our stance is that this vote will most definitely affect the UK, which exports nearly 45% of its production to the EU. Renegotiating trade rules between the UK and the EU will take years, but knowledge of what is coming will have some level of negative impact on the UK economy. The vote will affect the EU, but less so. The EU exports 15% of its production to the UK, its largest single export market, only slightly more than the US. Thus, it will feel some pain of renegotiated trade agreements. The vote will have a much smaller effect on the U.S., for which trade with the UK accounts for only 4% of exports. Since we only export 15% of our total production in the first place, we likely won’t notice any material difference at all.

In central banking, the story is about reversing expectations. The FOMC started 2016 forecasting up to four interest rate increases throughout the year. After the disappointing data and financial market upheaval in the first quarter, they reduced that outlook to two rate rises. Public speeches since then suggest that number declining even further. We think this is short-sighted and partly a function of the election cycle. The FOMC professes data dependence in their policy-making decisions. It seems to us that their practice of looking forward 12-18 months to assess the impact of their decisions here and now, has contracted in the most extreme way. How else can we explain the frequency of their changing opinions based on the most recent data release? The FOMC has kept rates so low for so long, they are left with very few options for the next time. Because we haven’t eliminated the business cycle, there will be a next time. But putting off rate rises indefinitely seems an imprudent course when you consider the data through our lens.

U.S. economic growth in the second quarter is expected at 2.5% plus and is headed in the right direction after a 1.1% first quarter. Oil prices are well off their lows from February and the energy industry should finally turn into a tailwind rather than the millstone of the last two years for corporate profits. The U.S. is one of the very few economies showing strengthening inflation with some core measures in excess of 2.0% and upward trending energy prices. Jobs growth continues to advance, keeping unemployment below 5% and showing businesses are still hiring and expressing their own economic optimism.

With the FOMC making very clear that they give international conditions more weight in their deliberations than ever before, we see little chance of a rate rise before the fall elections. Beyond November, the only certainty is that by December we will have a new President-elect and very possibly a new economic team. Until then, there will be little change in rates.