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UK Stocks: How the Brexit Bombshell Failed to Go Off

See what happened instead

by Nico Isaac
Updated: March 30, 2017

Take a good long look at the following news items. They went live on the same exact day, within hours of each other:

"FTSE 100 ends higher as starting gun for Brexit is fired." (MarketWatch)

-versus-

"FTSE 100 drops into the red as Article 50 is triggered and Brexit officially starts." (The Sun)

In the first one, UK Prime Minister Theresa May's March 29 signing of Article 50 of the Lisbon Treaty to officiate Britain's exit from the European Union -- well, that was supposedly bullish for UK stocks.

And in the second one, the exact same event was somehow bearish for stocks.

Any questions?

Well, either science has it wrong and one event can produce two opposing results -- the pothole gave you a flat tire AND the pothole did nothing at all.

Or -- news events don't drive price trends; rather; price trends happen first, and then the news is retrofitted to reflect the tenor of that change.

It's a common experience in mainstream finance; one we like to call "driving your car using the rearview mirror." A great way to miss potential potholes, as it were! Another common go-to -- besides using news events to explain the past -- is to use those same events to predict the future.

Remember when Brexit was first announced back in June 2016? Well, at the time, everyone from Wall Street to High Street believed the UK referendum was the biggest, baddest, bearish bombshell to hit stocks since World War II.

Here, these news items from the days following the June 23 "Leave" vote reset the dark mood:

  • "Just the Start of the Brexit's Economic Disaster" (New York Times)
  • "Brexit Blues. The hangover from the UK's decision to exit the EU continued to weigh on risk assets... Stocks have entered a new realm of volatility unlikely to abate any time soon. Better get used to it." (USA Today)
  • "Brexit Vote Batters UK Stocks. The post-Brexit financial world remains deeply uncertain... Investors are going to be far more cautious." (The Guardian)

What followed, however, was the exact opposite. Investors were about as cautious as a puppy approaching a plate of bacon. In other words, they were all over equities, sending UK stocks soaring to new highs.

To put the post-Brexit rally into perspective, our March 2017 European Financial Forecast shows the following chart of the broader FTSE 250 index and writes:

"Indeed, the index's all-time high of 18,864 on February 15 represents a massive 26% surge since the Brexit vote on June 24, 2016.

"In January and February, moreover, the FTSE 250 recorded seven consecutive all-time highs, the longest stretch of new highs in more than two years."

Not only that, public opinion about how Brexit will affect stocks has undergone a complete, 180-degree turnaround. Writes European Financial Forecast:

"At this point, the rally is forcing even the most hardened Brexit bears to readjust their views. In January 2017, Bank of England Governor Mark Carney -- one of Britain's most outspoken Brexit critics -- "performed his biggest U-turn yet when he admitted that Brexit was not his top concern." (Daily Mail, 1/11/17)

Mainstream analysts' first attempt to use Brexit to predict stock market ruin failed.

Now, our analysis shows whether predictions of a post-Brexit revival will succeed.

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