So What Became of the "Brexit"?
And we are back! A lot has happened in the world (and the stock market) over the past few months, but probably the most common question I've received from friends and colleagues: "What do you think Brexit will do to the stock market?"
My response? "Long-term: nothing."
For those of you who may have been living under a rock, back on June 23, 2016 the United Kingdom held a national vote to reverse the 1975 referendum which effectively brought the country into the membership of the European Economic Community (EEC). The reversal vote, caused the United Kingdom to leave (or exit) the European Union. The UK was not bound by the euro for its currency (the British pound was far stronger) so this did not heavily impact the euro to the point that it disrupted currency strength for all the other European nations. While "Brexit" has plenty of political implications, I'm not here to discuss any of those; I will only touch on the economic factors.
The net result was a massive crash of global stock markets and the British pound dropped to its worse level in years. Many investors ran around screaming, truly believing that this was the crash of 2008 all over again. The important lesson here is to never fall into the trap of how politicians and regular people are viewing the market - economists know best, kids.
Not surprisingly, at least to me, economic stability has since returned to the markets. In fact, this past Friday's session brought the S&P 500 to a new all-time high, while the Dow Jones Industrial Average and the NASDAQ are both hovering close to their all-time highs as well. The attitude is pretty much reflected in the following chart of the S&P 500 year-to-date (YTD) and it is pretty obvious where the Brexit pitfall occurred.
So why did the market tank and rebound so quickly? The answer is not abundantly clear, as many economists expected a bear market to last longer since it was expected that chaos would erupt across other major European economies and they would end up leaving the EU, too. While this may be in the minds of some European citizens, ultimately this fear has clearly been quelled for the time being. Much of the fear centered on how other countries would react and for the moment, this is not a major concern. Additionally, the British economy will be impacted hard in the near-term, but long-term the negotiation of their own trade and possessing their own economic sovereignty should give them a boost.
Lesson here? Don't buy the hype...again. The world won't end until it does. In the meantime, don't be afraid to invest your money where your heart is, and don't worry about the political actions across the ocean.