On Friday investors awoke to the stunning news that the British people had voted to leave the European Union. It was a shock to betting markets, complacent pundits and Wall Street gurus and a real blow to a half-century’s worth of increased European integration and globalization.
It also pummeled the markets, lopping $3 trillion off people’s portfolios and making Friday and Monday the biggest two-day loss ever for global stock investors, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The Dow Jones Industrial Average
finished Monday nearly 900 points off Thursday’s close, and the S&P 500
dropped more than a hundred points from its near-record close Thursday. Gold
has rallied big time, and so have 10-year Treasury notes, whose yield dropped to 1.46% Monday, within a hair of its 2012 record low.
So, has Brexit brought on a bear market? Not so fast.
Considering everything that happened, Friday and Monday’s selling looked pretty orderly to me. Yes, there was some panic, but nowhere near like there was after the collapse of Lehman Brothers in September 2008, when fear of financial collapse was rife — and justified — and the global economy nearly ground to a halt.
European stocks were hit hardest — and I mean continental European markets like Spain and Italy, but not the U.K., whose FTSE 100
sold off slightly more than U.S. markets did.
Investors dutifully took out and shot the sectors that would be Brexit’s biggest victims — banks, airlines, British homebuilders. That made sense, as market participants need to recalculate appropriate valuations for industries whose earnings are most likely to be hit by a Brexit.
But stocks rallied Tuesday (along with crude oil, which had dropped from its $50-a-barrel recent price), and the CBOE Volatilty Index
settled down a bit as markets advanced. The much-feared VIX got as high as 26 — roughly where it hit during February’s mini-panic — before retreating.
So, a semblance of calm has returned as people realize the U.K. and the EU will have to sort out the details while Great Britain works its way through its own messy politics over this issue. That means months of uncertainty and volatility, rather than a Lehman or 1987-like stock market crash.
Meanwhile, central banks have moved to reassure the markets, and the much-criticized reforms of Dodd-Frank and Basel III have forced giant banks to jettison risky investments and hold more capital. That has greatly reduced the likelihood of contagion, and investors know it.
And now, after all the brouhaha, the Dow and the S&P 500 are less than 5% below their all-time highs. The S&P 500 would have to fall another 200 points, or 10%, before even getting to its February lows — and that represented only a 15% correction from its all-time highs. It would have to drop to 1,700 to even meet the common definition of a bear market, i.e., a 20% decline from the top.
That strikes me as very unlikely, which also makes this column’s own new year’s prediction of a bear market look at best premature, and probably wrong.
But that doesn’t mean clear sailing ahead. The chart below shows the S&P 500’s struggles to match its all-time highs of last May.
The index has failed four or five times to break through to new highs, and that means what the technicians call overhead resistance is very strong. It’s hard to envision the catalyst that will help stocks break through decisively, and please don’t tell me about a “wall of worry,” one of the buy-buy-buy side’s great clichés.
The market has many problems. Over the next few months, Brexit may push the U.K. into a mild recession, slow already anemic global growth and, most of all, increase uncertainty among businesses that already are reluctant to hire or invest in new equipment.
Also, watch the Chinese yuan, which hit a five-year low during the Brexit mini-panic. It may fall more as China’s growth prospects continue to slow.
So, Brexit won’t be the end of civilization as we know it, and it likely won’t be the beginning of a new bear market. But it adds more risk to markets that already have plenty and more trouble to a world of woes.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.