Watershed Vote Ruins S&P 500 Week Though Bulls Elude Armageddon

  • S&P 500 down 1.6% after Friday erased gains in prior four days
  • Investors see U.S. as best place for return on investment

British secession left investors from Europe to Asia scrambling to tourniquet losses amid plunging equity prices. Viewed from a wider lens, however, the bludgeoning looks more like a blip for U.S. investors.

After futures plunged more than 5 percent in the darkest hours of Brexit drama early Friday, the S&P 500 Index reverted, erasing nearly half of its losses by the time exchanges opened. Because it rallied 2 percent in the four days leading into the vote, the index finished the week down just 1.6 percent, compared with losses double those in other developed-world markets.

“This is arguably the most important vote of the year, possibly a generation,” Erik Davidson, the 54 year-old chief investment officer for Wells Fargo & Co.’s private bank, said by phone. He oversees about $200 billion. “But I don’t think the reaction in the U.S. is a naïve one. The U.S. economy is not as dependent on trade as many other developed nations are. This selloff is an opportunistic one to buy.”

The pound fell the most on record, Japanese stocks lost the most since 2011 and the Euro Stoxx 50 Index tumbled the most since at least 1987. In the U.S., Treasuries rallied, sending yields on the benchmark 10-year down the most in more than seven years. Still, even after a drop of 3.6 percent on Friday, the S&P 500 stayed near the roughly 80-point range between 2,040 and 2,120, in which it has been locked since late March. It closed Friday at 2,037.3.

That doesn’t mean the biggest single-day loss since August was painless. As votes rolled in, early indications were for a “Remain,” sending S&P 500 futures higher before their eventual lurch.

“I’ve been involved in the financial markets for years and this is some of the most volatility I’ve ever seen,” said Chris Gaffney, president of EverBank World Markets in St. Louis. “In 30 years, there’s seldom singular events like this that can cause this much volatility. It’s a once-in-a-decade type of event.”

Part of the relative buoyancy in U.S. stocks may be because American companies are insulated from the region. Just 171 companies in the S&P 500 disclosed sales from Europe in 2015, and the region was responsible for just 6 percent of total revenue in the index, according to data compiled by Bloomberg.

Chances of a Brexit as indicated by various polls and oddsmakers vacillated leading up to the vote, as a peculiar environment arose in the U.S. stock market as well. In the week prior to the decision, the S&P 500 climbed 0.7 percent and the CBOE Volatility Index -- known as the VIX -- added 5.1 percent. The two have moved inversely to each other 82 percent of the time the past decade.

That relationship suggests some investors were bracing for a surprise move in markets by hedging with volatility instruments, according to Troy Gayeski, a senior fund manager at SkyBridge Capital, the hedge-fund investment firm founded by Anthony Scaramucci.

“Even though equities are up the VIX is at 18.3 because people are happy to pay the premium to protect themselves,” Gayeski said in a phone interview before the vote. “In the hedge fund community, there’s a small minority that -- even though the probability is low -- is more than happy to remain fairly hedged, because the ramifications of the leave vote have remained so dire.”

After the U.K. voting results were tallied, central bankers on Friday were quick to give assurances that policy makers stand ready to intervene. Governor Mark Carney said the Bank of England could pump billions of pounds into the financial system, and the European Central Bank said it will give banks all the funding they require to counter market turmoil. The Federal Reserve said it was “carefully monitoring” financial markets.

Nine of 10 industry groups in the S&P 500 declined on the week, as phone stocks were the only sector to eke out a gain. Materials shares led losses, falling 2.6 percent. Financial companies, targeted by analysts as the most susceptible to fallout from a “Leave’’ vote, followed with a 2.4 percent retreat.

Companies in the Nasdaq 100 Index fell the most in the U.S., losing 2 percent. The Dow Jones Industrial Average lost 1.6 percent to 17,399.86. While U.S. investors didn’t suffer the same degree of selling as in Europe, history shows U.S. stocks aren’t completely insulated from big losses in overseas markets.

Since 1986, when the Euro Stoxx 50 loses at least 5 percent in a single day, the S&P 500 on average drops as much as 6 percent in the next week. Over the next month, the trough occurs at a loss of 8.3 percent, according to data compiled by Bloomberg.

“Once the dust settles, the sun will still come out and nothing really changes,” Chris Semenuk, manager of TIAA Global Asset Management’s $4.3 billion International Equity Fund, said by phone. “The economy in Europe is still continuing to get better and European stocks are cheap. This is a negotiation that will take years. The world doesn’t stop.”

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