Five years from now, what we will all be saying regarding June 24, 2016? As many of you have heard, the Global markets are down at the beginning of the trading day today due to the "Brexit." "Brexit" is the term for a referendum for Great Britain to leave the European Union. (If you remember your high school government courses, referenda are non-binding. Of course, many governments will abide by the majority decision, though in a tightly contested vote you may see additional referenda.) Scotland largely voted to remain in the European Union.
Markets were down big overnight, when it became clear the vote was to leave the European Union. We are very early in suggesting what the markets will do in the long term, but we do have some thoughts to share.
Try to keep in mind that one day (or year, for that matter) does not predict how you will do in the market. Much the same way that one note does not make a symphony. Markets tend to overreact on most news. At the beginning of trading Friday, the markets were down 500 points on the S&P 500, but in context this is not that significant of a move. For those that follow stock markets, 500 points is a pretty big swing, compared to what we are used to seeing on a typical day. But, for those that truly follow the markets on a daily basis, this move only takes us back to where we were at the end of the last quarter. If memory serves me correctly, we certainly didn't hear from anyone about the poor shape of his or her portfolio.
Some of what you will see on Friday is the impact of an annual event, the reconstitution of the Russell Indices (primarilly the Russell 1000 and 2000 – large and small cap US stocks). A reconstitution is the realignment of the holdings in a benchmark due to certain stocks coming in or leaving the benchmark due to not meeting the criteria to remain. This well publicized event (in the investment community), in and of itself will add volatility to the market. We usually don't blog this type of event as it typically does not account for a jaw-dropping move in the market, but in combination with the "Brexit" vote, we should expect more volatility.
For those that hold some gold, now may be the time to sell. Though the day is not over, we are seeing gold prices up a greater percentage than the stock markets are down. And, we would not be complete if we didn't mention that most portfolios hold bonds, which are offering your portfolio some downside protection, the reason we hold them in the first place.
Most major global events will invoke some reaction from the markets. Which market, and by how much is anyone's guess. Mark our words, you will hear from all of those that predicted this. Our recommendation is to ignore those voices, as one correct prediction means absolutely nothing. We should be interested in the long-term impact, not the knee-jerk reaction that we typically see within minutes of an announcement. In this case, the markets priced in a substantial increase early in the week – in many cases we are seeing an erosion of those increases.