Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Britain's vote to leave the European Union is shaping up as a black swan event.

Despite polls showing split intentions, investors hadn't fully priced in the Brexit vote. History suggests the pain is far from over, even if markets end higher this week.

The 4.9 percent drop in the MSCI World Index on Friday was more than six standard deviations higher than the average daily return for the broad stock benchmark. Those dislocations are very rare. Some of them, however, have been followed by misleading bounces shortly after the initial sell-off. And it's precisely those examples that turned out to be the nastiest in the medium term.

The most remarkable, and perhaps clearest, example was when Lehman Brothers filed for bankruptcy on Sept. 15, 2008. That day, the S&P 500 tumbled 4.7 percent but went on to end the week 0.3 percent higher. The gauge then proceeded to lose 29.3 percent over the following three months.

Zombie Cat Bounce
The week Lehman Brothers filed for bankruptcy, the S&P 500 finished up 0.3 percent, only to plunge almost 30 percent in the following three months
Source: Bloomberg

Key to the index's fall over a longer time was the seizure of interbank liquidity, which didn't play out entirely in the first week.

More recently, on Thursday Aug. 4, 2011, the MSCI World dropped 4.3 percent, a more than six-sigma shift, ahead of Standard & Poor's decision to downgrade the U.S. from AAA. By Monday's close, the gauge had slid 6.3 percent but by Friday, had gained 4.2 percent. The benchmark found its bottom for that year on Oct. 4 at 1,074.50. By its peak on May 21, 2015, investors were sitting on a 68.5 percent return.

Difficult to Pick
The week the U.S. was downgraded, markets tanked. The low, on Oct. 4, 2011, marked the start of a bull run
Source: Bloomberg

There are other examples of dead cat bounces further back, too. A mini-crash ensued on Oct. 27, 1997 after investors realized nations in Asia were going to have to massively devalue their currencies. The MSCI World fell 4.4 percent that day only to rally the next two days before slipping to a low that year of 889.80 on Nov. 12. In the 12 months that followed, the index returned 17 percent.

It's hard to apply history lessons to an event as unique as Brexit. Yet many investors are wondering whether Friday's sell-off was overdone: witness today's 2 percent rebound in Japan's Nikkei 225 Stock Average. Baron Rothschild is credited with saying that the "time to buy is when there's blood in the streets," and it's true that market dislocations such as these often present opportunities for investors with a longer-term horizon.

To think that less than a week after such a seismic event the worst has passed would be naive.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net