If you had any doubt that markets are efficient and respond to news as soon as it is released, the current market reaction to Brexit (British exit from the European Union) should erase this doubts.
Stock markets and futures around the world declined on the news that it has appeared the vote to leave passed by a narrow margin. Â The reason for the market movement is that it was widely expected that the vote would result in Britain remaining in the Union. Â Investors don’t like surprises, because they mean uncertainty.
From a rational point of view, this decline makes perfect sense. If the outcome of an event is uncertain, an investor will require more return to take the additional risk perceived. Â The only way to increase the expected return is to pay a lower price.
While some people believe that this recent turn of events will have a negative impact on economies around the world, there are some that strongly believe it will lead to more freedom and economic growth. Â Only time will tell for sure.
So what should an investor do in light of the news?
First, recognize that the news is already factored into market prices and responding to it is like closing the barn door after the horse has escaped.
Second, keep in mind that companies around the world will respond in a way that serves their best interest. As an owner of stocks, that is exactly what you want.
Third, remember that we don’t know what the next 20% move in the stock market will be, however the next 100% move has always been up.
