With the anticipation of the United Kingdom likely to remain in the European Union and the sudden upset to leave, markets around the world have taken a huge hit. On the heels of the turnaround in sentiment in Britain, Prime Minister David Cameron announced his resignation effective in October. The more serious consequences of the popular referendum, however, is whether other European Union members will defect. And there is a possibility that Scotland and Northern Ireland, which wanted the U.K. to stay, will seek alternatives themselves and rattle European economies further. On the equity front, European markets could experience a short-term market correction of 5% to 10%, according to J.P, Morgan Private Bank, while U.S. equity markets could experience a market correction that would be about half that amount. Nonetheless, once we receive greater clarity regarding the settlement of trade and other important economic issues, stocks should be able to bounce back from their initial declines.
As of this posting, the S&P 500 Index is off by about 3%; but less than what we have seen in Europe and Asia since the release of the vote. Although traders are heading for the exits, I don’t believe investors should panic and allow cooler heads to prevail. It will take about two years for all the necessary trade agreements to fall into place and U.S. stocks will likely turn inward and focus on our domestic economy, interest rates, the November election and corporate earnings. Hence, I believe the response – although serious – is more of a knee-jerk reaction to the news and stocks should recover over time. While readers need to prepare for extreme volatility in the days and weeks ahead, I advise: Think Long-Term.