Lessons from Brexit

Contributed by: Jeff Dobyns, CFP®, CLU, ChFC

As I have reflected on the market performance over the past couple weeks, I felt it was a good time to send a quick message about the “Brexit” effect on the markets, the sudden initial drop, and the subsequent speedy recovery to the new highs we are currently experiencing.

It is often said that the market moves over the short-term on emotions and over the long-term on company fundamentals, like earnings.  This certainly proved true in the days following the “Brexit” news.  In the wake of this news, the S&P 500 dropped 5.3% over the next two days.  While it is not uncommon for the market to have a drop that size over a longer period of time, such as a month, what was alarming about this drop was the speed of it – two days.  This was reminiscent of the 6.7% drop in one day in August 2011 when the USA debt was downgraded.

I watched the news over the weekend after the initial Brexit story broke and the first day the market went down.  The headlines used words like “plunge” and “plummet” when talking about 401(k)s and IRAs.  “Analysts” said we are at the cusp of another recession.  For the entire weekend and the following Monday, all the news talked about was fear, doom and gloom regarding the economy and your investments.  I’ve been in this business a long time but the speed of this drop and the talking heads on the news even had me questioning for a bit.

During this time, I read an article where the journalist was interviewing a portfolio manager for a major investment company that manages billions of dollars.  He used the word “salivating” when describing the deals he was seeing in the market.  He went on to say that the market is essentially having a one or two day sale and the smart investors were scooping up the bargains.  He humorously illustrated that if Target was having a two day sale where everything is 5% to 10% off, people would be flocking to the store.  The market was having the same type of sale and people were leaving.

However, as I currently write this, the Dow is at record highs, currently above 18,500.  In fact, in just 8 short trading days from the bottom of the Brexit market dip, the Dow had surpassed the prior high.  Brexit is still being discussed a bit in the news but it is really taking a backseat now to other headlines.  What’s more, the discussion of how the Brexit is going to impact the US economy and the world economy is hardly being covered.  It’s as if it is a non-issue at this point.

What has changed to make the market recover so quickly and force the news channels to move on to other stories?  Did we have some unbelievably good news in regards to the economy?  Did earnings reports come out and just crush analyst estimates?  No.  The world simply moved on.  Apple kept selling iPhones.  McDonalds kept selling hamburgers.  Companies continued selling products and making money.  The smart investors continued to buy into the market.  The fears subdued.  The reality that the world isn’t coming to an end and that Brexit is not going to crush our economy settled in.  We returned to normal.

I am certainly not saying all is right in the world or that the US and global economies are in incredible shape.  What I am saying is that there seems to be an ongoing spirit of pessimism these days in regards to the economy, even though it has strengthened significantly for the past several years, and any perceived bad news can have a sizeable short-term impact on the market (Brexit, US debt downgrade, Flash Crash, etc.).  However, it is important to remember in times like these some simple investing truths that have helped investors be successful over the long term:

  1. Do not let your emotions get the best of you.  More money is lost by knee-jerk reactions to negative news than any other single factor in investing.
  2. Do not try to time the market.  You have to be right twice.  You have to know when to get out and when to get back in.  No one has ever been able to consistently do this.
  3. Investing is a long-term game.  It is not fair or healthy to view your investments in a short-term vacuum (day, week, month, or even a couple years).  The market has short-term zigs and zags and longer term cycles but the market has historically rewarded the long-term player well.
  4. Do not be more aggressive than you need to be.  Have a plan for your investments and determine the most risk-efficient route to getting there.
  5. Be diversified.  This has been a hard one the past few years as large US companies continue to do extremely well compared to world markets.  However, we have seen this story before (think early 2000s) and the subsequent market period resulting in international markets outperforming the US.

I consider it a privilege to work with each of you and I know when the market is dropping (and dropping fast!), the last thing any of us want to hear is “hold on”.  However, it is this inaction that helps lead to successful long term results.  We are working hard for you and oftentimes working hard for you means keeping you off the ledge of making a mistake based on short-term fears.

If you have any questions or if I can help in any way, please let me know.

 

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jeffrey Dobyns and are not necessarily those of Raymond James. Investing involves risk, investors may incur a profit or loss regardless of the strategies employed. Diversification does not ensure a profit or guarantee against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

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