By Philip Bachman
The Dow Jones Industrial Average opened down over 500 points on June 24, 2016 after the results of Brexit – the United Kingdom’s referendum to leave the European Union – came in overnight. In a historic and unprecedented decision, the British people voted 52%-48% to leave the European Union. The “Leave” decision came as a surprise to many analysts, giving way to significant moves in global markets.
On the morning of June 24, the S&P 500 experienced its worst open since 1986. The Dow was down 538 points within minutes of the market open. Meanwhile, U.S. bond prices were higher; yields were lower. The British pound and euro lost value relative to the U.S. dollar.
Proponents of the “Remain” vote (UK to stay a member of the EU) claimed that Britain would be stronger with the EU than without it, largely because of its European economic partnership. Those in favor of the “Leave” vote (UK to give up EU membership) said that Britain has given up much sovereignty to Brussels since joining the EU in 1973 and desired to separate from heavy EU bureaucracy and regulations. Upon the “Leave” victory, British Prime Minister David Cameron, who campaigned for the “Remain” vote, announced his intention to resign by October.
What are investors to do? For long-term investors, it is important not to panic. Today’s market action is disheartening, but the markets have experienced many similar down days throughout history and have bounced back each time.
With regards to Brexit itself, it is important to keep the news in perspective. The actual unwinding of the relationship will take about two years. The likelihood is that the UK and EU will negotiate trade deals and other deals in the meantime. The UK is the world’s fifth largest economy, and over half of its trade is done outside the EU.
Jeff Kleintop, Chief Global Investment Strategist at Charles Schwab, said on CNBC, “We don’t believe investors should be doing anything this morning,” saying that investors with long-term time horizons probably have a diversified portfolio built to withstand developments like today’s Brexit news. Kleintop continued by suggesting that investors interpret today’s market action as a shock that should resolve itself sooner rather than later.
Time will tell what the aftermath of Brexit will be. News like Brexit represents the unknown that investors face – risk for which investors have been rewarded for in the past over a span of time.