What happened in the market this week? Nothing really. In fact, as of 10:15 a.m. ET on Friday, the S&P 500 index was within a few ticks of last Friday's close (2059). Of course, with over four hours remaining in the session, a lot can happen.
However, keep in mind the index returned to that level after a frightening 120-point plunge in Friday's pre-market session. At one point, it went limit down at 1999 for roughly 20 minutes from 12:35 a.m. ET until to 12:55 a.m. ET.
All About Brexit
What will be glorified in the mainstream media will be the frenzied trading action ahead of the Brexit vote and aftermath, which the market and polls got completely wrong. Earlier in week, S&P 500 index futures had sharply higher opens. On Monday, the index surrendered some of the gains, but on Thursday and into Friday's pre-market just kept going higher before it collapsed.
In reality, Britain remaining in the European Union would have maintained the status quo in the worldwide monetary and banking system. Therefore, was there any real reason to aggressively buy equities that as of late were struggling near the top of two-year plus trading range (1800-2100 for the S&P 500 index)?
How did Great Britain remaining in the European Union automatically increase the value of U.S. equities? Will Apple Inc. AAPL sell more iPhones? Will General Motors GM or Ford F sell more cars? Will people be smoking more cigarettes and drinking more Coca-Cola KO?
Does Great Britain leaving the European Union mean the exact opposite of the aforementioned scenarios? No.
There's no doubt the impact of the vote is going to have a significant impact on selective sectors of the U.S. equities markets; Most definitely a disconnect in the worldwide banking system, which is being reflected in today's price action.
Black Friday
At time of writing, the S&P 500 index was off by 2.75 percent, while the Financial Select Sector SPDR Fund XLF was off by nearly 5 percent. This is the direct result of the of the beating the European banks took in Friday's session.
Deutsche Bank AG (USA) DB shares are trading lower by $2.84 (16 percent) at $15 and Barclays PLC (ADR) BCS shares are trading lower by $2.54 (23 percent) at $8.64. However, in the case of Deutsche Bank, it had already been trading at multi-year lows and well below its Financial Crisis lows ($20.97).
Issues in the financial sector may have a harder time recovering until there's some clarity as how to Great Britain plans to repair the damage with its trading partners.
On the flip side, sectors such as utilities will continue to be a safe haven as investors looking for yield in these times will flock to these issues. For example, the Utilities SPDR (ETF) XLU is actually in the green by $0.25 at $50.59 in Friday's session.
What's Next?
So how should the average investor approach this week's mind-boggling price action? The same way they would treat their portfolio under similar circumstances. In other words, evaluate your appetite for the upcoming volatility and make the necessary adjustments to your portfolio. Perhaps trimming some of your positions in sectors that may be most impacted by the vote or putting some cash to work in areas that may fare better.
The headlines over the weekend will focus on Friday's plunge, but may fail to mention that for the most part, the market itself hasn't determined the true long-term impact of Great Britain's exit from the European Union.
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