On June 23rd 52% of Great Britain voted to leave the European Union in a referendum, which subsequently triggered the resignation of European Prime Minister David Cameron. The slim margin of victory is an indication of how divisive UK citizens are on the topic. While there has been much speculation leading up to and since the vote, many of the longer-term implications of the referendum remain unclear, as the process for negotiating what a UK exit may look like is expected to be lengthy.
Initial market reaction to the news was typical of market reaction to uncertainty, with stocks and stock futures falling across the globe and safe haven assets, such as Treasuries and gold, rising on the news. The "leave" vote pushed the British pound to a 30-year low in the immediate aftermath. London and European markets also fell in reaction to the referendum, with the FTSE 100 and FTSE 250 down by about 7 percent each. Here at home, the S&P 500 was not immune to the volatility, dropping by about 3%.
Market forecasters largely got it wrong on the direction they thought this vote would go. In the days leading up to the referendum we saw European market appreciation in anticipation of a UK "stay" outcome. When it became apparent the vote would go in the other direction, the subsequent market reaction was similar to the typical reaction we've seen time and time again. Uncertainty causes stock prices to fall, and quality fixed income prices to rise.
Regardless of yesterday’s decision, in the short term we were likely to experience periods of market euphoria or uncertainty. Markets often react sharply. It’s happened many times before and much worse than this. We have nearly 100 years of evidence to support their resiliency. It’s important to keep in mind that the UK only represents about 6% of the world equity market capitalization. In contrast the United States represents about 52%. The entire European Union accounts for around 17% of the world’s economic output.
Prognosticators will make sweeping statements in an attempt to garner as much attention as possible. We firmly believe that no one has the ability to predict the future when it comes to markets. A solid example is the failure of forecasters to predict this outcome. Markets move with new information. By definition news is unpredictable. When volatility shows up, prices move and not always in the direction you like them to. However, it's precisely that risk which investors have to accept for the expectation of higher long-term growth.
The coming weeks, months and years are a far better barometer on the underlying issues that led to a Brexit referendum in the first place. The vote in and of itself demonstrates the level of attention to the issues facing Europe. Reacting to its outcome is not the proper course of action because future implications are impossible to predict. If you're portfolio is broadly diversified with exposure to multiple countries, sectors, industries and asset classes, you've already done everything you can to minimize the effects of Brexit and other expected events.
By Tim Baker, CFP®
Advice and investment design should rely on long term, proven evidence. This column is dedicated to helping investors across the country, from all walks of life to understand the benefits of disciplined investing and the importance of planning.