Uncertainty breeds contempt... or is that profit?
Every so often, an event occurs which rattles the markets. Wait, what am I saying? What I mean to say is that events shape markets no matter what. Nearly every significant real world occurrence has an impact. A hurricane causes billions of dollars worth of damage? Home insurance companies don't post a profit that quarter. This will drop the stock value even before the hurricane hits, it could even be as simple as the weather forecaster saying it will be a big one.
It seems to me, some large scale real world events are like huge dominoes falling over. My previous example of a hurricane is a great one, because you can see the winds and pressures forming several days or a week before the damage begins to occur on shore. As such, the impact on the market will begin in advance of the damage actually occurring. Neat concept, as it can effectively be used to predict the future.
Here is an article which talks about these effects and more.
So examine Brexit, the British exit from the EU, under our crystal ball of hurricane wizardry. The effect on stocks are clearly summarized in the image below which I borrowed from HERE.
Without getting super technical, it looks like the stock market overreacted to the result of the vote, and then almost immediately recovered. In this instance, it can be likened to a hurricane that was predicted and never ended up materializing on shore. In the event of a hurricane, the probability of it not causing damage is almost nil once wind speed and momentum of the storm get above a certain point. However, some events, which seem like they would have a great effect on the world, end up having little to no effect at all.
In continuing our analysis of Brexit, even if the British people rallied for a shock vote to leave the union, it wouldn't physically change anything for months, even years. But yet as you can see, there was quite a bit of stock tumble in the FTSE 100 just hours after the vote! Seemingly for no reason, but the only real reasons were hype and speculation.
Now that I have attempted to kickstart your brain again with a few real world examples I would pose the following question to you:
What similarities/differences do you see between the Brexit vote and the US presidential election?
Here is my list of similarities (assuming this was pre-brexit so I only use 1 tense below):
- It is statistically possible that the vote could come out the opposite of what the experts are telling us the outcome will be.
- Neither outcome will affect the way the world is run for months or even years. Period.
- Both are significant in that they are influenced heavily by peoples' heartfelt opinion of how the world should be. And no matter what, certain groups will feel overly defeated when the results are in.
- Neither vote will make a damn bit of difference how you live your day to day life.
I am not going to list the differences. What you need to be prepared to do is invest if the election is a "shock" outcome. Where you invest is up to you. Think about it.