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Brexit and the Stock Market

June 24, 2016

Yesterday British citizens voted decisively to leave the European Union (an event which has been referred to in the press as "Brexit"). Today, world stock markets are taking a beating. Following are a few of the headlines:

 

Wall Street Journal: "Markets Roiled as U.K. Votes to Leave EU"

New York Times: "Turbulence and Uncertainty for the Market After 'Brexit'"

Reuters: "World stocks tumble as Britain votes for EU exit"

 

Do these headlines make you nervous about investing in stocks? During such times, it may be helpful to gain a sense of perspective by looking back at history.

 

Below are several international crises, each of which raised major uncertainties and roiled markets. As you read the list, ask yourself, "In the Grand Scheme, how does Brexit rank?"

 

World War I

Great Depression

World War II

Korean War

Cuban Missile Crisis

1973-74 oil crisis

Gulf War

September 11 terrorist attacks

 

Despite their scariness, good businesses pulled through tough times and eventually earned satisfactory returns on capital employed. Stock markets were, of course, significantly affected. But what were once sizable market drops, now appear as minuscule blips in the market's spectacular upward trend of the past century. None of the above crises were able to permanently defeat the stock market. The market's long-term record remains perfect.

 

The future is never certain. We tend to forget this, and major world events such as Brexit are helpful reminders. It would be a wrong conclusion, I think, to avoid stocks because we lack certainty.

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