The Three-Day Rule for Rattled Investors
In any news-driven market crisis, wait until the third business day after the news breaks to trade anything.
For all their glorious history, the British, by voting to leave the European Union, have created a new standard for political and financial recklessness. In one fell swoop, voters in the world’s fifth-largest economy managed to sack the prime minister, undermine their nation’s currency, threaten its global political stature and jeopardize its critical banking sector. At stake: potential job losses, intensified class warfare and who knows what else.
Financial markets hate chaos, even when it’s occurring in a small country such as Greece. When a big-league nation loses its mind, investors pay a terrible price. On June 24, the day after voters in the United Kingdom approved a referendum to leave the EU, stock markets worldwide lost more than $2 trillion. On June 27, stocks kissed off another trillion. But by the time the second quarter ended a few days later, the Dow Jones industrial average sat 866 points above its June 27 low. Investors had recouped most of their losses—that is, those investors who didn’t hastily dump their stocks and stock funds.
This prompts me to reiterate the three-day rule, my personal iron law of investing, because Brexit absolutely revalidates it. Simply put, in any news-driven market crisis, wait until the third business day after the news breaks to trade anything—bonds, stocks, funds, gold, anything. Meditate. Breathe. Savor fine wine. Just don’t obsess.
Never mind how much shareholder value the TV shouting heads say just got “destroyed.” The selling waves are almost always fleeting, as plenty of previous seismic events—Chinese growth scares, Federal Reserve credit tightening, U.S. debt-ceiling brinkmanship, terrorist atrocities—underscore. Losses generally persist for about 72 hours, not counting weekends and holidays. Then bargain hunters and computer-driven buyers arrive, markets go green, and the sense of dread lifts.
I am not suggesting that you pretend nothing happened. These episodes are opportune times to reassess your strategy, your holdings and your tolerance for risk.
Beyond that, Brexit should have a noticeable impact on interest rates and rate-sensitive investments. By sparking talk of recession in the U.K. and continental Europe, Brexit is yet another depressant on rates, both here and abroad. That means the 35-year-long bull market in Treasuries and high-quality corporate and tax-free bonds is alive and well (bond prices move in the opposite direction of interest rates). The chances that the Fed will kill the bull with a series of rate hikes later this year have fallen from slim to nil.
In fact, the Brexiteers unwittingly padded values in the U.S. bond market. Ryan ALM calculates daily indexes for every Treasury maturity from one month to 30 years. Applying Ryan’s numbers to the $11.9 trillion of outstanding Treasury debt, I figure that post-vote bond buying added more than $110 billion to the combined market value of all Treasury bills, notes and bonds in three days.
Other yield investments benefited, too.
The stars: utility stocks, those indefatigable generators of power, heat and dividends. In the first six months of 2016, the Dow Jones utility index returned 20% (including dividends). Because of this stunning performance and the resulting high valuations, the sector is ripe for a correction. That said, you shouldn’t jettison long-held utilities that are delivering high dividend yields based on your original cost.
Finally, turbulence overseas reinforces the dollar’s stature as the ultimate safe harbor. A strong dollar, although a negative for U.S. exporters and multinationals, should hold down inflation and help keep interest rates low. Turmoil in the U.K. and Europe poses diplomatic, political and security risks. But it shouldn’t have a dramatic impact on your financial strategy.