Thursday’s U.K. vote to leave the European Union is throwing global markets into turmoil, pushing the British pound lower against major global currencies and threatening to unravel the EU itself.
British Prime Minister David Cameron has already announced his resignation as the world’s fifth-largest economy seems poised to go into a recession. The Federal Reserve will likely hold off on any interest rate increases in the near future as markets look to regain their footing. Stock indices are rattled, as few experts accurately predicted the vote’s outcome.
So it’s an awful day for investors, right? Maybe. But this is no time to panic.
“If you’re actually a buy-and-hold investor, nothing — not a Brexit, not a flash crash, not an alien invasion — should have you bailing right now,” says Kyle Woodley, managing editor of InvestorPlace.com. “Yes, the S&P 500 losing roughly 4 percent today to sit around 2,000 isn’t a pleasant thought … until you realize that’s nearly 30 percent better than where we were sitting before the market started to tank in 2007.”
[See: The 9 Best Investors of All Time.]
In fact, the Dow Jones industrial average and the Standard & Poor’s 500 index both rose nicely in the week before Thursday’s vote, so losses realized today and into next week will largely only serve to wipe out short-term gains. And even with the market opening more than 2.5 percent down Friday, Wall Street is nearly even for the year to date.
A ‘knee-jerk’ reaction. Today’s market turmoil is nothing more than a “knee-jerk reaction” as investors try to reposition themselves following a surprise vote, says Michael Kramer, a portfolio manager on Covestor, the online investing company, and founder of Mott Capital Management, a registered investment advisor in Garden City, New York.
“The markets have been caught completely off guard by these results,” he says. “The expectation into this event was for the U.K. to remain. … The results of the vote will take a long time to play out.”
Britain leaving the European Union is another example of how political events are unpredictable, says Yale Bock, a portfolio manager on Covestor and president of Y H & C in Las Vegas. “From a financial perspective, it introduces the lingering question of the strength of the European Union and these issues will not be solved quickly, so political uncertainty will be in the market for a while.”
Bock says Wall Street will still revolve on profits and earnings from individual companies, not political turmoil. “The fluctuations in currencies and regulatory changes and their impact on specific companies will get digested over time,” he says. “Some of the reactions in markets will be extreme and in time should moderate.”
“We had a big relief rally in expectation of a ‘stay’ vote, so hold on to your hats because markets now have to reprice for the outcome,” says Greg McBride, Bankrate.com’s chief financial analyst. “Today will be an ugly day in global financial markets. But since nothing will change right away, a market overreaction presents an attractive buying opportunity.”
Jason Rasnick, founder and CEO of Benzinga, a financial news and data outlet in Detroit, is also bullish on stocks after the vote.
“This can actually be a good thing for long-term investors looking for a buying opportunity,” he says. “Remember that the market always rebounds. If you’re really spooked, there’s no harm in waiting this out, but overall I definitely wouldn’t be afraid of the market, especially U.S. equities.”
How to trade Brexit. Is it ever a good time to take advantage of market turmoil? Trying to time the market can be an awful idea, for sure — more often than not an individual investor trying to take advantage of a short-term situation will lose more than he wins on a trade, particularly when fees and commissions are taken into account.
But there are times on Wall Street when the price of an equity just becomes too good to pass up, as evidenced by perhaps the greatest buy-and-hold investor of all time, Warren Buffett. The Oracle of Omaha bucked conventional wisdom and took a $1 billion stake in Apple (ticker: AAPL) this spring even though the stock has dropped more than 25 percent in the last year. That was too good to pass up.
[Read: Why Warren Buffett Snapped Up Apple Stock (AAPL).]
So how can you trade like Buffett?
“An old trick used by Sir John Templeton was to place good-until-cancelled limit orders at prices far below current prices so that, in the event of a market crash, he was automatically buying stocks he liked at good prices and wouldn’t allow his emotions to talk him out of it,” says Charles Sizemore, chief investment officer at Sizemore Capital Management, a registered investment advisor in Dallas. “I think that’s a good move here. Follow Templeton’s lead and place some lowball limit orders. They might just get filled.”
British stocks. Juliet Cohn, a portfolio manager with Principal Global Investors, thinks the U.K. will thrive in or out of the EU given that it is a global and open economy.
Britain leaving the EU is worse for the EU than for Britain, she says.
But Brian Hennessey, portfolio manager with Alpine Funds, managed by Alpine Woods Capital Investors in Purchase, New York, says it is hard to see U.K. stocks continuing to outperform the rest of Europe as Brexit offsets the positive mix of U.K. companies with strong balance sheets, earnings and management teams.
Other countries such as Italy or Spain which, unlike Britain, use the euro, are likely to want to leave too, he says.
For investors looking to get exposure to the U.K. economy with an exchange-traded fund, Hennessey points to the iShares MSCI United Kingdom ETF (EWU) as its top five holdings — HSBC Holdings (HSBC), British American Tobacco, Royal Dutch Shell, (RDS.A), BP (BP) and GlaxoSmithKline (GSK) — are strong multinationals that will survive under the Brexit scenario.
Other trades to make. Some investors who are retiring or planning major purchases soon (such as paying for a child’s college) don’t have the flexibility to wait for markets to bounce back.
“If you have a very limited time horizon and might need your funds within the next year or two, consider extreme preservation mode via cash, bonds and other safe-haven investments. Otherwise, rest easier knowing this: Bear markets on average last 10 months and the longest S&P 500 bear market to date was 31 months.” Woodley says.
[See: 11 Ways President Trump’s Tax Plan Could Affect Americans.]
“So unless you’re hard up for cash right now,” he says, “close your eyes, hold a friend’s hand, wait it out and buy dips where you can.”
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Wall Street Is Overreacting Over Brexit originally appeared on usnews.com
