On Friday morning last week, Alan Greenspan, the typically unruffled former chairman of the Federal Reserve, declared the Brexit vote “the worst period I recall since I’ve been in public service”—the 1987 crash included. A prominent London-based trader fretted: “this is as big as 2008 and has the potential to be even bigger.”
These dire predictions came against the backdrop of falling markets world-wide. The day the Brexit result was announced, Japan’s Nikkei dropped 8%, but it recovered 4% this week. France’s CAC fell 10% in the first two trading days but is up 5% since Monday. In the U.S., the S&P 500 lost 5% in two days but has rebounded 3%. The Nasdaq Composite shed 6% by Monday’s close, only to regain 4%. The declines might seem dramatic, but the past week of trading simply puts the U.S. markets back where they were three months ago.
Investors would do well to recall market overreactions from the recent past. During the 2013 taper tantrum, the S&P 500 dropped nearly 5% and then recovered the entire amount in 10 trading days. The China growth crisis at the beginning of this year caused the Dow Jones Industrial Average to fall more than 11%, followed by a full recovery within seven weeks. The Greek debt referendum in 2015 caused an almost 12% pullback in the Nasdaq Composite, which recovered in nine weeks.
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