Brexit in Context

Brexit in Context

Published On: June 27, 2016

Written by: Ben Atwater and Matt Malick

On Friday, we experienced the first wave of fallout from Brexit – the United Kingdom (UK) referendum to leave the European Union (EU) – and we are seeing continued losses across markets today. In our view, the selling is quickly becoming overdone.

There are still a myriad of unknowns about the mechanics of how, when or if the UK and the EU will divorce.

Ironically, based on the initial economic and political fallout in the UK, it is very possible that the UK referendum may ultimately strengthen the EU. As the citizens of member nations see the chaos, they may be more satisfied with the EU and the status quo. If the EU indeed becomes more stable as a result of Brexit, this would be an unanticipated silver lining. There is much uncertainty about Europe right now, but not all of the scenarios are negative.

Last year, on August 21st, the Dow dropped 530.94 points (3.12%), on August 24th it fell 588.40 points (3.57%) and again on September 1st it plummeted 469.36 points (2.84%). The drops last year coincided with “Chinese growth concerns.”

So, Friday’s loss of 610.39 points (3.39%) was not unprecedented (we had a larger percentage drop only 10 months ago). In late 2008, during the financial crisis, the Dow lost 7.87% in one day and in late 1987 it lost 22.61% in one day. Markets are volatile. They always have been. It is vital to remember that even with computer trading and instantaneous information, markets are no more volatile today than they have been historically.

Any hiccups in the markets over the last eight years have naturally invited analogies to the financial crisis and some of the events that spurred the financial crisis, like the bankruptcies of Bear Stearns and Lehman Brothers. Despite such stretched metaphors, our view is that this conjecture is nonsensical. Every blip on the radar doesn’t require a
hyperbolic comparison.

Investing requires extreme patience. Global equities have been stagnant for several years now, while U.S. equities have been a bit better. Now is the time to be holding and buying stocks, not a time to be selling them – the 2010s will likely prove to be a decent time to have been invested. The key is to keep patiently compounding returns over multi-year periods, despite the occasional panic.

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