When we warned earlier this year to brace for significant market volatility throughout this election year, a “Brexit” is not what we had in mind.
For those of you hearing this term for the first time today, you may want to get used to hearing it. We are going to hear a lot about it in the weeks and months ahead.
What is “Brexit”?
In short, Britain + Exit = Brexit. Yesterday, the United Kingdom went to the polls for a referendum vote on whether to leave the European Union. In short, the leave vote won 52% to 48%.
Why does it matter to you?
First, in the immediate term (ie. today), this is a bit of a shock to the markets. Virtually all economists and politicians were in favor of staying, and the polls leading up to the vote indicated that was the likely result. In fact, global markets had risen significantly this week in anticipation of a vote in favor of the UK staying in.
Today, you woke up to the markets dropping in a pretty severe way. However, it is important to note that this is simply the market repricing what it was incorrectly predicting earlier in the week.
Your headlines are going to read that the European markets are plummeting, tumbling, being routed, and I have even seen the term “free-falling.” Indeed, they are.
However, what none of these headlines even bother mentioning is that the MSCI Europe stock index had risen 9.75% in the last 5 days leading up to today. Today, not surprisingly, the broad European market is down just over 9%, essentially just giving back what it had gained earlier in the week.
Similarly, the US market had risen over 2% in the last 5 days. Today, it looks like it will open down around 3% – 3.5%.
What it all boils down to is that you are no worse off today than you were 5 – 10 days ago.
These sharp movements are certainly not cause for panic. They are not “losses.” They are simply the market doing what it does…very efficiently and rapidly pricing in all available information.
I stayed up into the wee hours of the morning last night watching this play out and it was fascinating to see that the very moment the results started to come through, the live markets in China and Japan instantly dropped, and the futures market in Europe and the US immediately swung well into negative territory as well. The market has already priced in this move, so there is no need to make a panicked decision today.
Unless you are in a profession that engages in a lot of international commerce – particularly in Europe – there is not a lot to do today relating to this news. I know the initial reaction based on these alarming headlines is to “do something,” but that is how mistakes are made.
In the mid-to-longer term, you are going to read a lot about the impact this will have, but the reality is that this is unprecedented. No one has ever left the European Union before. This unwinding is likely to take years…not days, not weeks, not months. New policy and laws are most certainly not kicking in today.
Ultimately, countries are going to have to rewrite trade agreements, and companies are going to have to restructure themselves to comply. Banking regulation in Europe is going to change, immigration laws are going to change, and central banking operations are going to change. How are they going to change? We don’t know yet, and it will likely be awhile before we do.
Today, take a deep breath. The reason the markets are reacting so violently is because it was unexpected. And further, no one actually knows what happens next.
Markets do not like surprises and they do not like uncertainty. That is precisely what we are waking up to today. However, just keep in mind that the downward movements are nearly identical to the upward gains from earlier in the week. This is a reset, not a crash. And as the process plays itself out, the impact to you is going to be a lot less than it feels today.