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Patience And Balance In A Post Brexit Market

By SA Editor Mike Taylor :

The UK has decided to leave the European Union and now market participants have to consider the consequences. Overnight and into the morning, broad indices have provided unsubtle hints about where to look. Europe's Stoxx 50 index dropped more than 10% and the FTSE 100 dropped around 8% before moderating losses.

At the open, U.S. trading revealed the Atlantic Ocean is at best a modest barrier against the turmoil. The S&P 500 opened down -3.45% amid larger losses for the Nasdaq. Markets had seemed to price in a "remain" vote, drifting happily upward early in the week. Now, the outlook is far less positive.

It's tempting to look at Brexit as a signpost event. The UK's departure from the EU captures many fears that can be expected to drive sentiment: Political polarization and volatility, a reversal of a decades-long trend favoring global trade and economic unification, an eye once again on policymakers' reaction to disruption in the financial system. That the decision seems to have been made on a politico-economic razor's edge (51.9% leave, 48.1% stay) only heightens the drama.

Investors perceive drastic consequences. Citing markets' short-term underreaction to evidence of the 2008 financial crises, Short/Long Trader raises the prospect of "Lehman 2.0 ." The global sell-off is just beginning , and the Fed has little leverage to help, says Orange Peel Investments. Worse, unusual events seem to be happening with disconcerting frequency, and there's nowhere to hide , says The Heisenberg.

The political stakes are high. Owen Williams, CFA, considers the echoes of emergent "beggar thy neighbor" attitudes in the U.S. and elsewhere in Europe. The Brexit vote is a triumph of nationalism over globalism , and the EU looks to be weaker going forward, says Gary Bourgeault. Meanwhile, David Moenning questions whether Brexit "will embolden others and further fragment the European Union." Eyes will be on the global banking system, says Moenning, while arguably "the game of global central bank intervention will continue unabated."

On the other hand, on we go. The "real economy" tends to muddle along, eventually. Short-term volatility can overstate the impact of any single event, and amid the mess, there's a distinct attitude that investors would be wise to stay the course. "Don't overthink it," says Terrier Investing : If your strategy didn't heavily factor in global macro events, why step outside your area of competence? Stateside, there are pockets of the market that should experience "little to no first-order impact."

"The sun will rise in the morning, and the British will still enjoy fish and chips in the afternoon," so while tactical adjustments may be prudent, now is not the time to do anything drastic , says Forward View. Lehman has lessons for us, but the word of the day is discipline , says Eric Parnell, CFA.

Hale Stewart points out the relative health of both the U.K. and European economies, while pointing out that "no one will do anything in the UK for the foreseeable future as business awaits the UK-EU exit negotiations to start and then progress."

The tension on the site between well-founded trepidation and a search for reasons to be courageous underscores the difficulty with looming crises: We determine their severity with hindsight. In the meantime, investors seem to be watching, hoping not to exacerbate the damage.

More Brexit analysis on Seeking Alpha:

See also Second Quarter 2016 Commentary And Performance on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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