June 29, 2016

Scott L. Wren, Senior Global Equity Strategist

Post-Brexit Hysteria

  • U.S. Equity market volatility is likely to continue, to the upside and downside, in coming weeks as investors seek more clarity on the UK referendum result that will likely take years to play out completely.

What it may mean for investors

  • In our opinion, we continue to see modest growth with only modest inflation in much of the world. U.S. growth is dependable in our opinion. U.S. stocks will likely see some “perceived safe haven” inflows. Stay invested.

Emotion frequently gets the best of investors during times of uncertainty. In the equity market it often translates into buying high and selling low. It’s just the opposite of what anyone with an ounce of experience in the investing business would recommend. When this “strategy” is followed time and time again over the course of multiple years and multiple market cycles, one’s returns are impacted in a meaningfully negative way, to say the least. When times are good and the economic sun has been shining for some time, everyone wants to jump on the bandwagon. They don’t want to miss the next leg higher. Some might even think investing is easy and risk-free. You jump in and buy stocks and they keep going up, right? How hard can that be?

The other side of the coin isn’t quite as fun. When investors forget that equity markets ebb and flow, they get into trouble. What frequently happens is cautious investors sit on the sidelines during the initial stages of a stock market and economic recovery. Since the stock market typically leads (or anticipates) the economic recovery, many investors wonder why equities are going up when the economy still looks to be in the tank. Then, slowly, over the course of six or nine months, the economic news improves. But many investors don’t want to believe the worst is over or that the improving trend will continue. What do they do instead? They sit on their hands and wait for the skies to clear further. Of course, by the time that happens stocks are typically a good bit higher and the investor has yet to commit new funds to the market. By the time they finally commit, they are frequently buying near an interim top in the market.

So how can we think about this type of behavior in the context of last Thursday’s decision by the electorate of the United Kingdom to leave the European Union? Last Friday, in the wake of the decision, global stock markets plunged while U.S. Treasury bonds rallied as investors ran for cover. Then again on Monday of this week, investors decided that stocks were maybe not the place to be as another round of equity selling ensued. If you listened to many in the media and in various political circles, you would have thought the world as we know it might be starting to unravel. Some even claimed that this marked “the end of globalization.”

Despite all of the hyperbole, the S&P 500, at the time of this writing, is 1.2 percent below where it closed the day prior to last week’s UK referendum and 3.5 percent below the all-time record high set in May of last year. Apparently many in the investing world didn’t get the message it was time to panic. We agree.

There is a term for investors behaving or reacting in an extreme or uncontrolled way because of fear. In this case fear of the unknown. That term is hysteria. Welcome to the post-“Brexit” U.S. stock market. We think clearer heads will prevail soon.

Risk Factors

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. Wells Fargo Investment Institute is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the GIS division of Wells Fargo Investment Institute. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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