Unexpected change takes getting used to… whether it’s Brexit or babies.
Thursday’s vote in Great Britain to leave the European Union triggered huge volatility in markets around the world. The British pound collapsed like a thinly traded penny stock, falling 8 percent to 30-year lows. The Spanish stock market fell 12 percent, and U.S. shares declined 3.5 percent on Friday, as measured by the S&P 500. Overall, stock markets around the world lost more than US$2 trillion in value.
Brexit was no Black Swan. But most people who read (and write) the financial media believed that U.K. voters would decide that staying in the European Union was the smarter thing to do. When in fact U.K. voters decided to exit, many investors – in the same echo chamber of the financial media – were taken by surprise.
The winners of uncertainty
Among other things, Brexit is a big steaming serving of uncertainty. Investors hate uncertainty – and the reflex is to sell in the face of it. Short-term market volatility is a great way for nimble traders to profit from nervous sellers.
What investors do with that cash is buy so-called safe havens assets. Gold (the best insurance for market uncertainty, as we’ve written before) jumped nearly 5 percent on Friday. And gold miners, as measured by the VanEck Vectors Gold Miners ETF (ticker: GDX), rose nearly 6 percent. The Japanese yen moved up almost 4 percent versus the U.S. dollar.
The Chinese stock market (Shanghai Composite Index), largely insulated from what happens in the rest of the world thanks to capital controls and limitations on international portfolio investment, fell a modest 1.3 percent.
It will take a while for investors to get used to the new reality of Great Britain leaving the European Union, and to understand the economic, financial and political implications of it. What happens to the 44 percent of British exports that go to the European Union? How will Brexit affect banks, and the pharmaceutical industry, and automakers, and every other industry? Where will the millions of British citizens living in Europe go? How will Londoners find someone to unclog their sinks?
Pregnant with Brexit
In that way, Brexit is like pregnancy. Even if you were anticipating the possibility (and especially if you were not), the news that you’re going to have a baby is a sudden shock (the equivalent of the sharp declines in markets on Friday). After that, the many changes that a needy small person will impose on your life take some time to get used to. Your initial euphoria – and/or alarm – will wear off as the new reality settles in with you.
That process is what will happen in coming days with Brexit. Markets are made up of millions of individuals with their own agendas, concerns and challenges. Brexit will take a while to be “priced in” to the market, as investors begin to figure out the specifics of what Brexit will entail, and what it will mean for Britain, and for the future of Europe, and for the global economy.
Meanwhile, overblown initial reactions to Brexit (“the most significant political risk the world has experienced since the Cuban Missile Crisis,” wrote one commentator) will be tempered after some reflection. Market volatility will decline as investors get used to Brexit. As we wrote recently, countries in Asia have a lot to fear. But it isn’t the end of the world: It’s just a different world that takes some getting used to.