On June 23, the United Kingdom voted in favor of what has become famously known as Brexit, a referendum instructing the British government to exit the European Union. This vote surprised most every poll and odds maker who ventured a guess on the outcome.
That day, the Dow Jones Industrial Average* (the Dow) closed before election results were known at 18,011.07.
The next day the Dow lost more than 610 points in response to the surprise outcome. As concern spread over the weekend, the average continued another 260 points lower on Monday, closing at 17,140.24.
Many in the financial world saw this as an overreaction. Sure, there would be the potential for some negative effects on markets, but what they would be would take years to parse out. Surely, the markets will eventually correct back to something close to where they were.
What happened next was pretty astounding. As financial and broader media reflected over the long road ahead for a true Brexit, the market indeed began to recover. Quickly. In fact, by that Friday, July 1st, the Dow had almost fully regained its losses, closing at 17,949.37.
In August, during intraday trading, the Dow reached 18,934.05, an all-time high.
As the election got closer and the race tightened, the market grew more uncertain and moved lower, as a result. As of November 4th, the Friday before the election, it dipped below 18,000 to close at 17,888.28.
The common thought was that a Clinton victory would provide stability to markets. Companies and investors could largely count on the status quo. The market could take some comfort in stability. A Trump victory was full of questions to say the least and the market would almost certainly respond negatively.
Over the weekend leading up to the election, a Clinton victory appeared more certain, at least, according to polls and other expert sources. Favoring certainty over most anything, the market responded positively, closing on Election day at 18,332.74.
That night, of course, Donald Trump was announced as the winner of the 2016 Presidential election.
Overnight, Dow Jones Industrial Futures, a type of contract that attempts to indicate how the actual index will open and perform the next day, plummeted. At one point, Dow futures were down as much as 800 points, indicating an opening of around 17,532 or so.
At 9:30a on Wednesday, November 9th, U.S. markets opened. Things fluctuated at first, then headed on a steady direction before closing as usual at 4pm.
The Dow was up 256.95 points to close at 18,589.69. This upward trend has continued. As of this writing on Monday, November 14th, the Dow is trading at 18,877.08.
This story is not to frighten, delight or confuse. Markets are often extremely volatile within a trading day or even over several weeks or months.
It’s instead to shine a light on what seems to be a growing trend. In a world where information is available to all at lightning speed, it remains human nature to want to win the race. To react first in this day and age does not allow time for even the briefest of pauses to reflect when unexpected events occur.
In that moment, the reaction can feel like a good thing. You’re doing something. You’re responding.
But in almost every other context, most would argue that the idea of reacting, then reflecting is wholly misguided. Reflection is necessary in any good decision-making process.
In markets, this trend is unlikely to stop any time soon. Unexpected events continue to be met with outsized volatility compared to their long-term impacts. Many of these events have little, if anything, to do with how companies and economies actually perform over the long run. Nevertheless, many investors feel compelled to trade.
At TAAG, we look at potential opportunities to trade in our client portfolios on an account by account basis at least every five business days. Our disciplined rebalancing method allows the time needed to reflect on where asset classes are in relationship to one another and whether some of these knee jerk reactions in markets present opportunities to sell out of outperforming areas or buy into those that may be temporarily depressed. It also allows us to take into account the client themselves. For example, a client’s upcoming cash needs may render a rebalancing opportunity moot.
By taking the human element out of the equation when it comes to sizing up what the market is telling us and inserting it back into the equation as to whether or not a trade makes sense for the individual client, we can be sensitive to cost, time horizon and several other factors that allow for a portfolio to perform at a higher level over the long term than it otherwise might.
The internal reaction we have when news reaches us is perfectly natural. There’s little we can do to avoid it. But taking action based on that internal reaction is where we can get ourselves into real trouble. Putting processes in place to avoid that trouble is just part of the value of a good rebalancing strategy.