Putting “Brexit” in Perspective

Blog - 6 - 07 - 16

On June 24, Americans woke up to the stunning news that the United Kingdom’s citizens had voted to leave the European Union. The development touched off a rout in the stock market, with the S&P 500 index tumbling more than 5% over the following two days.

The market volatility, which came on top of a long period of weak performance, made many investors even more pessimistic and anxious than they had been. But Brexit, as it’s been dubbed, doesn’t look quite so troubling when it’s placed in historical perspective.

Brexit can be thought of as a divorce between the U.K. and the 27 other members of the European Union. The split is unfortunate and upsetting, and creates a number of question marks. But as with any divorce, life goes on. The U.K. and the E.U. will negotiate the terms of a new relationship, and eventually stability will return.

Indeed, investors seemed to sense this, based on how quickly the stock market recovered from its initial Brexit losses. Five days after the dip, the S&P had reversed course and gained 5%, bringing it near its pre-Brexit levels.

Investors who turned overly defensive based on the U.K.’s split from Europe missed part or all of this bounce-back. Those who did nothing, on the other hand, came out close to even.

Now for the historical perspective: Bad things have always occurred on a regular basis. And markets have always bounced back, just as they did after Brexit. Here’s a sampling.

• Black Monday. On October 16, 1987, the S&P 500 Index fell 5.2%. The following Monday, it promptly plunged another 20.5%, in a cascade of events explained in part by high-speed computerized trading. Did the market stay down? To the contrary, it proceeded to rise 23.2% within the next 12 months. Five years later, it was up 83% from its Black Monday depths.

• Pound crisis. In September, 1992, Britain withdrew its weakened currency from the European Exchange Rate Mechanism, triggering a recession in that country. But within a few years, the U.K.’s economy was expanding rapidly. By the end of 1999, the FTSE 100 Index gained 171% from its 1992 lows.

• 9/11 attacks. The September 11, 2001, terror attacks sent the S&P into a 12% decline over a 10-day period. But the market rallied by 20% over the next three months.

• U.S. housing bust. Weighed down by the U.S. housing crisis, global investment bank Lehman Brothers filed for bankruptcy in September of 2008. A financial crisis and deep recession ensued, and the S&P plunged more than 42%. Yet in the following year it rallied to the tune of 72.3%. In the seven years since Lehman Brothers, it gained 200% total.

The news media has a way of making the latest crisis seem like the most dire. But there has rarely if ever been a situation in which making knee- jerk changes would have improved the long-term performance of your investment portfolio. Indeed, acting from emotion typically results in the cardinal mistake of selling low and buying high.

Headlines come and go. But the key to investment success remains the same: Create a solid long-term investment strategy tailored to your situation, goals and time horizon. And then keep your eye on those long-term goals, not on the headlines of the day.