Election Collection: Roll Bounce: How Markets React to Shocks

When the United Kingdom (UK) surprised the world with their decision to leave the European Union (EU) in late June, U.S. and international stock markets did not respond well. Stocks around the world sold off because investors were concerned that this could slow economic growth in various regions and may lead to other countries leaving the EU.

Quick sell offs like these have happened historically and they will most likely happen again. Looking back at 14 major market shocks since World War II, the adjacent table shows that investors react first and then ask questions later. The median decline on the first day of the market shock was -2.5%. Usually, markets continued to decline following the event, eventually bottoming out 8 days after the event with a median total decline of -5.3%. It then took a median of only 14 days for the stock market to recover to where it was prior to the market shock.

Since this table includes a wide variety of events, there are a wide variety of outcomes. Many events were short lived, where quick market losses were replaced by quick market recoveries. Some of the larger declines, like the Lehman Bankruptcy, took more time to recover from.History already seems to be repeating itself with the UK referendum reaction. Stocks declined for two days and then advanced for at least three days. This is how the market digests new information.

While it may make investing frustrating along the way, markets have historically rewarded those that tolerated this volatility. In fact, avoiding impulsive decisions around times of market shocks has been one of the best ways to preserve and grow wealth. We call this staying invested and staying focused on what is important (hint: it’s not the news of the day, it’s your goals).

Source: S&P Capital IQ. Past performance is not indicative of future results. All Indices are unmanaged and are not available for direct investment. The S&P 500 is a market capitalization-weighted index of 500 widely held large cap stocks often used as a proxy for the stock market.