Back at the computer after a weekend away and I’m now consuming a massive amount of commentary on the shock that is “Brexit”. As I read the attention grabbing rambles from economist types, I get almost (one exception so far) nothing that sounds remotely good — from a macroeconomic standpoint. From the investment types I find the field fairly split between doomsayers and pollyannas.
Having done what I do for as long as I’ve done it, I’ve become committed to a cynical narrative that says the blokes whom you see on CNBC and read in the Wall Street Journal, etc., tend to — intentionally or otherwise — preach their positioning. Meaning, if they’re bullish and long (own) stocks, their eyes are forever blinded by shiny silver linings. If, on the other hand, they’re bearish and short (betting on a drop) stocks, they see nothing but dark tunnels without the slightest glimmers signaling forthcoming ends.
That said, on deeper analysis it may be that, whether we’re talking economists or analysts, the folks whose stature puts them on the media stage are doing little more than exhibiting their personality traits, supported by the bias-confirming data that they unwittingly mined on behalf of impulses they can’t control (much of my recent study has been on trader/investor psychology).
Ok, so beyond my cynicism and psychobabble, what’s next?
Well, when it comes to Brexit, there’s an array of possibilities:
Britain’s Prime Minister Cameron resigned and will clean out his desk on October 1st. If the new PM then passes “Article 50” in Parliament, a two-year negotiation process begins. If they can get it done in that short a span, trade relationships would be normalized and case closed. If they can’t get it done in two years, and both sides don’t agree to extend negotiations, well, there’ll be some real problems when it comes to UK/EU trade. Of course there’ll also be the negotiating of trade agreements between the UK and countries outside the EU, which could be sources of uncertainty all their own. And what if the new PM doesn’t pass Article 50? While there’s rumblings that those who led the leave charge are now exhibiting a bit of timidity, the people have spoken and, therefore, I seriously doubt that the political will exists to not move forward with Brexit. That said, the fact that we’re talking Brexit at all means anything can happen. And I didn’t even get to Scotland and Northern Ireland, UK members that voted to remain in the EU and whose leaders are extremely upset about the outcome. They’re looking into legal interpretations that suggest they can stand in Brexit’s way. So, confusion rules for the moment…
Ok, so what’s next for the markets?
Well, I can get really into the weeds and start with currencies, and how the dollar and the yen will strengthen and how virtually everybody else’s will weaken. And how such strength won’t bode well for the U.S.’s and Japan’s equity markets (although Japan is up 2% as I type [go figure!]), and how the pound — along with UK and other EU members’ equities — will continue to get utterly, well, pounded.
But wait a sec! While the above accurately describes Friday, and I suspect tomorrow — and who knows how long after that — the UK will remain in the EU, with all its trade advantages, for at least the next two years. And I suspect that it won’t be long before typically myopic markets will wake up to that fact and, thus, begin to calm down. Plus, according to Ned Davis Research:
… more often than not, the stock market quickly recovers from the losses it inevitably incurs in the immediate aftermath of such a crisis. On average across all 51 crises, the Dow Jones industrial average within six months was higher than where it stood prior to the market’s initial plunge. Within a year it was 6.3% higher.
… on a median basis, shocks normally cause stocks to bottom out six days after the shock hits, with a total drop of 5.3%. And in looking at the 14 market “shocks” since World War II, the market has taken a median of just 14 days to recover all its losses
While history is never a sure thing, it does advise strongly that times like these are times to, at a minimum, hunker down. At a maximum, they’re times to buy like crazy (but, in my very strong opinion, only if it happens to be time to rebalance your portfolio within your established strategy/discipline, or if you have cash that was already en route to the equity portion of your portfolio — and only if you’re patient and have a strong stomach. And, please, forget the “like crazy” part!).
Of course the above begs the question, am I not just another one of those advisers who preaches his positions and/or is a slave to his personality traits? And, therefore, since our clients all own equities to one degree or another, am I not simply one of those blind polyannas and/or a hopeless happy-go-lucky optimist? Well, that all could be. However, in my own defense, if you’ve been watching my videos for the past few months you know that I’ve been somewhat of a party-pooper on the recent rally. But now, after Friday’s plunge and the likelihood of more near-term pain to come — while I’m not ready to freshen up the punch bowl just yet — don’t be too surprised if I start sounding a wee bit cheerier in the not-too-distant future…
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