Originally published in OnWallStreet http://www.onwallstreet.com/opinion/why-market-turmoil-was-always-going-to-subside-quickly-after-brexit
By Garvin Jabusch
Why did Brexit have to equal market turmoil? Was Britain going to stop all commerce, quit consuming, and cease all import and export activity? What about Europe? Will global trade falter?
No, advisers can tell their clients that Brexit will most likely cause none of that. Events like debt crises, fiscal cliffs and market bubbles will always capture headlines, but, unless they represent the exceedingly rare event that really does change the trajectory of the world economy, they are short lived. Even so, many advisers have to spend the majority of their time convincing clients not to overreact.
Here’s why advisers may want to tell their clients that it’s almost never worth the knee-jerk reaction: Some economists still see some declines as a possible outcome. The Economist recently reported that George Osborne, chancellor of the U.K. Treasury, estimates GDP may be 6.2% lower than it would otherwise have been by 2030. The annual cost he predicts works out to be £4,300 ($6,000) per household. The implication, however, is the U.K. economy will still grow between now and 2030, but perhaps a bit more slowly than if it had stayed in the EU.
The U.K. Treasury’s estimate, according to The Economist, are based on the assumption that its future trading relationship with Europe will include membership in the European Economic Area, like Norway; or a negotiated bilateral free-trade deal similar to Switzerland’s or Canada’s.
It’s worth noting that despite never having enjoyed membership in the EU, Norway, Switzerland and Canada’s economies are among the world’s best. I know, that’s merely a correlation, but still, it gives an idea of the economic capabilities of nations currently living in the U.K.’s likely near-future scenario.
Remember last summer’s market freak out during the Greek debt crisis? Forgotten by fall. The fiscal cliff selloff in response to the idea that the U.S. might default on its obligations hammered the markets in November 2012. But the reversion to the norm took days, and the event is barely a blip on the 5-year S&P 500 chart if you look today.
Economist Jeremy Grantham recently wrote that markets can be “depressed by a very obvious reason: the cloud of negatives, which generally and surprisingly have historically had very little effect individually on the market, but apparently do depress ‘comfort’ when gathered into an army of negatives. So, whenever the negative news cools down for a week or so, the market tries to get back to its ‘normal’ level, which is about 20% higher.”
Markets hate uncertainty. When they are reassured that the status quo won’t actually change much, they revert to the norm.
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