Freaking out about the Brexit? Keep calm and carry on. Investors should control what they can control. Events like the referendum vote or the upcoming US Presidential election fall outside of that realm.
Today’s market tantrum is not in reaction to any fundamental change. It is an emotional reaction to the unexpected. Consensus expert opinion (and bookmaker odds) are suddenly fallible, a revelation to our self-appointed betters (and bettors) who predict doom at every turn. When I went to bed last night around 1am, futures indicated a 700 point drop in the Dow Jones Industrial Average, or almost 4%. Why was I awake at 1am? I was fascinated that right along with my favorite personalities on Twitter, former child-star Lindsay Lohan was live tweeting the referendum results. This was a strong indicator of the level of hyperbole I expected today. I was not disappointed.
So let’s get the madness out of our system. There are fears that the Brexit will set off dominoes across Europe resulting in: Grexit, Polain’t, Donemark, Byeprus, Lithuadios, Departugal (my fave), Italeave, Czeckout, Swedone, Oustria, and Finish which would leave Germlonely and Remainia sobbing on each other’s shoulders while the British Pound is measured in Ounces. Ok, back to the real world…
The Clash finally got an answer to their question, “Should I stay or should I go?”, but the vote changes nothing overnight. It begins a process outlined below by AFP:
This is a years-long process with many moving parts. The UK isn’t cut off overnight and to think that continental Europe (and the rest of the planet, for that matter) won’t want to enact trade agreements as soon as possible would be unrealistic. The world will continue to turn.
The more even-minded commentators that I follow (Dr. David Kelly of JP Morgan, Jeffrey Kleintop of Schwab, the anonymous collective at Vanguard, among others) seem to agree on seeing a ripple effect spreading from the UK. The impact will be felt greatest there (in a negative fashion in the short term), and less significantly by those further away. The key thing the UK has in its favor is that it already has its own currency in the British Pound. This makes the exit from the EU much smoother than a Grexit, for example, because the UK doesn’t have to establish a new currency and deal with all the headaches that would bring (valuing the currency, putting it into circulation, determining whether to pay back other nations in Euro or the new currency, etc). The currency issue is a major hiccup for those sounding the domino alarm.
The cliché is that the markets hate uncertainty. This is true, but uncertainty also brings opportunity. By the time uncertainty fades, it’s too late. Certainty only exists in hindsight.