24 June 2016
The stock market hates uncertainty; that fact has been established from the day one. If the rest of the investing public hasn’t heard about “Brexit” vs “Bremain”…it’s not necessarily a bad thing. There is always something to worry about and now with a vote by the United Kingdom to leave the European Union the potential implications and chants of uncertainty will continue to create worry and panic.
Ironically enough, even amidst all the doom and gloom, the world is not that much different than before the vote. Although the U.K. surprised many with its vote to leave the EU, this decision and the potential fallout will take a couple of years to fully play itself out. Even though there will clearly be political uncertainty and initial volatility (which is natural)…the UK will have two years to negotiate the terms of its exit and establish a new relationship with the EU. Although there won’t be a shortage of opinions, this doesn’t imply an automatic death to the stock market!
It’s times like these that are EXACTLY why people overreact and make critical mistakes. Once people get over their initial reaction (shock, surprise, fear etc) the markets will see relief in knowing there is a result and a definitive decision. In other words…there will be some basic element of certainty and that allows markets to naturally correct and go back to moving based on actual fundamentals as opposed to speculative forces or fear.
What should one do in the near-term and will this lead to something worse?
1. Like any market correction or initial shock, don’t overreact and sell. Doing it within hours of an event is the ABSOLUTE worse time to make a move or any adjustment to your portfolio.
2. While today (Friday) is likely to see some major volatility and market pressure, it could also snap back quickly. Although we could see continued selling pressure into early next week, there could also be a strong bounce. Any such “bounce” doesn’t necessarily point to things being back to normal but gives you a chance to adjust and assess that the world will continue spinning.
3. There obviously could be spillover into other parts of the globe; certainly in the near-term with massive overreaction to this news. Eventually markets go back to working on fundamentals and as always this will provide an opportunity for those with discipline to make strategic decisions.
4. As with some points of uncertainty there comes a result of actual certainty! In other words, shock and surprise like this may mitigate worries of another kind. For example: All the concern about the Fed raising rates should lessen now and we’ll also see yields on Treasuries head lower. We correctly calmed investors about a June hike and that proved out just as today’s news all but guarantees no Fed decision to increase rates in July.
5. Lastly, where there is trouble there eventually comes opportunity. Look at the asset classes that will get initially dinged the most (obviously Europe and some Emerging Markets). Last month we “tapped the brakes” on our International allocation and this allows us to ‘go shopping for things that are on sale.’ That being said, you’ll want to eventually reallocate by selling some of what goes up (alternatives, bonds etc.) and buy what has been hit.
Remember, in times like these people almost always make the worst decisions. This is the perfect opportunity to try something different and calmly navigate the waters.
Like any uncertain or potentially challenging situation, “this too shall pass”…