If you turn on CNBC there is a sense of euphoria – Trump’s growth strategy, consumer confidence is high (last time it was this high was in July 2007, a good contrary indicator) and the stock market is at an all-time high (actually, the market as measured by the S&P 500 Index is only up 0.14% as of this morning since the last inter-day high on August 23^rd).  What you are not hearing about is the potential impact of a “No” vote in Italy this weekend.  Italy is voting on a referendum for constitutional change and the vote can impact whether Italy remains in or exits the European Union (“EU”).  This vote is different from the Brexit vote in that Italy uses the Euro as its currency whereas Britain does not.  The outcome of this vote is a significant risk to the EU and international markets.

How could a “No” vote impact Europe and the markets?  First, Italian bond yields are significantly lower than US bond yields (Italian 2-year bonds currently yield .09% compared to the US 2-year yield of 1.16%).  If a “No” vote causes loss of confidence in the sustainability of Italy and the EU, we would argue that interest rates in Italy will end up not only higher than US rates, but significantly so, which could be a shock to the system.  Second, Italian banks are in a weak position which leads to concern about several of them going under.  A “No” vote will certainly bring Italy’s bank problems to the forefront and might create more than just a minor bump throughout Europe.

What does this mean for investors?

Never let emotions dictate your investments.  For example, in 2009 shortly after Obama took office, many individual investors became nervous and sold off US stocks and either held cash or invested overseas (especially in emerging markets – remember how the BRIC countries were going to dominate the world?).  At that time, we were excited about the US stock market and had no money in emerging markets.  Why?  Valuations were as compelling as we had seen in years.  Today, it is the exact opposite for many investors.  They are excited – like CNBC is – about the US stock market and disenchanted with emerging markets.  As we tell our clients – “you can make money in any investment; it just depends on what price you pay for the investment.”  Based on valuations and several other key economic factors we track, our client portfolios are overweight emerging markets and underweight US-based large multi-national companies.  We believe that being disciplined in our investment process and valuations will prove to be successful as the face of Europe changes over the next 12 months.