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
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