As human beings, we have a tendency to believe we live in the most uncertain of times. Our fears are compounded by a 24-hour news cycle which bombards us with disconcerting stories and negative imagery. It’s no surprise then, that we believe our challenges are both unique and overwhelming.
But when viewed through the sobering lens of history we find they are neither.
Currently, financial markets are responding to the unexpected results of the UK referendum. It will take years for the UK to exit the European Union and to renegotiate trade agreements with the continent. Markets do not like uncertainty. Near-term volatility and sharp market drawdowns are to be expected as investors assess the likelihood of a prolonged period of economic uncertainty in the UK, the world’s fifth-largest economy.
A Historical Perspective on Brexit
What, then, should long-term investors do about it? Nothing. As long-term investors we adhere to principles of consistency and courage because we know that while we face many challenges, they are no more daunting than the crises of the past. We use historical perspective to remind ourselves that the markets react emotionally in the short term and rationally over the long term.
- On October 16, 1987, the S&P 500 Index was down 5.2% heading into the weekend. It then plunged 20.5% on Black Monday. Within 12 months the market had reclaimed its prior high and posted returns off the bottom of 23.2%, 23.9%, and 83.1% cumulatively in the 1-, 3- and 5-year periods, respectively.1
- On September 16, 1992, the British government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism after it was unable to overwhelm short sellers like George Soros and keep the pound above its agreed lower limit. The UK fell into recession. By the mid-1990s, the UK economy was expanding at a 3.0% pace,2 well above historical trend. Investors in the FTSE 100 Index gained approximately 171.4% cumulatively in the broad index from September 16, 1992, “breaking of the pound” through the end of the decade.3
- On September 11, 2001, a series of terror attacks against the United States resulted in a 12% decline in the S&P 500 Index over a 10-day period of which the market was closed for four of those days. Over the next three months, the S&P 500 rallied 20%.4 While the attacks of 9/11 may have little in common with the UK leaving the European Union, both were a shock to the world order and represented a severe disruption in economic activity.
- On September 15, 2008, the global investment bank Lehman Brothers went bankrupt under the weight of a housing bust in the United State and sparked a financial crisis. This sent the global economy into one of the deepest recessions in recent memory. From Lehman’s bankruptcy to the bottom in markets, the S&P 500 fell 42.4% before recovering to post 72.3%, 87.9%, and 160.8% cumulative returns in the 1-, 3- and 5-year periods, respectively.5 The market not only regained prior highs, it then went on to return over 200% cumulatively over the subsequent 7 years.
Investors Shouldn’t Overreact to Brexit
The past isn’t always a perfect corollary and other extenuating factors play a role in future returns. But the evidence overwhelmingly suggests that markets are incredibly resilient and often rebound to test and surpass prior highs. As Warren Buffett said during the height of the 2008 financial crisis, “In the twentieth century, the United States endured two world wars…the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
In reality there is little more to know. The next days may test our resolve and lead us to question our commitments to adhering to the principles of consistency and courage. Remember, the markets have faced crises before and ultimately continued their inexorable climb as the private sector uncovered new and remarkable ways to generate wealth and to improve the human condition. History suggests this time will be no different.
Compelling Wealth Management Conversations is a program designed to help provide philosophical and historical context and perspective, to keep investors “buckled in” and stay the course during uncertain times, while providing a framework to help identify the best opportunities.
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1 Source: Bloomberg, 12/31/15. Past performance does not guarantee future results.↩
2 Source: Bloomberg, 12/31/15. The mid 1990s include the years 1992-1998 when the UK Real GDP annual growth rates were 2.6%, 4.0%, 2.5%, 2.7%, 2.6% and 3.5% in chronological order. Past performance does not guarantee future results.↩
3 Source: Bloomberg, 12/31/15. Past performance does not guarantee future results.↩
4 Source: Bloomberg, 12/31/15. Past performance does not guarantee future results.↩
5 Source: Bloomberg, 12/31/15. Past performance does not guarantee future results.↩
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These views represent the opinions of OppenheimerFunds, Inc., and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.