In voting to leave the European Union, the British electorate sparked a dramatic and frightening trading day that, by some standards, will go down as one of the worst in history.
So certain was the financial world of the opposite referendum result that by the close of trading on Thursday, there was little if any concern evident in markets around the world.
The reaction to Brexit was fierce and the losses staggering – more than $2-trillion (U.S.), according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That figure ranks Friday's global selloff as the costliest on record, in dollar terms, Mr. Silverblatt said. Never before had a single trading day's damages exceeded the $2-trillion mark.
But as startling as that descent might be to investors, who may have found themselves materially poorer on paper as a result of Friday's volatility, there is comfort to be taken in the market's ability to quickly regain composure.
"Six months after these kinds of events, they're a blip," said David Baskin, president of Baskin Wealth Management. "Even Black Monday."
On Monday, Oct. 19, 1987, stock markets around the world went into free-fall, with the S&P 500 index dropping by more than 20 per cent by the closing bell. By January, 1989, the index had regained what was lost on that day.
Geopolitical shocks, like the one Britain delivered last week, can generate profound uncertainty, to which markets have a knack for overreacting. But one important lesson to take from the history of such destabilizing events is this: This, too, shall pass.
Here is how the market reacted to major geopolitical events in recent history – how great the losses, and how quick the recovery.
August, 2011 – European debt crisis/U.S. debt ceiling debates
The threats to global confidence were brewing on several different fronts that summer. An impasse in the U.S. Congress through July had seen the country flirt with default on its debt over the failure to raise the debt ceiling. Relief over an agreement struck at the end of July was short-lived, as markets succumbed to an array of geopolitical fears, primarily the European debt crisis. Without a specific inciting event to blame, markets sold off sharply on Aug. 4. The next day, Standard & Poor's downgraded U.S. sovereign debt for the first time ever, stripping the country of its top AAA rating. Those two trading days saw the S&P 500 decline by more than 11 per cent. While there were many chapters yet to come in Europe's debt saga, officials there were at least able to temporarily quell the market frenzy through emergency funding and austerity plans. Meanwhile, political gridlock over U.S. government spending cleared up, and the S&P 500 returned to its previous highs within six months. Standard & Poor's maintains a lowered AA+ rating on U.S. debt to this day.
Sept. 29, 2008 – U.S. bailout plan fails
The global banking system had already begun to freeze up and Lehman Brothers had already declared bankruptcy when the U.S. Congress defeated a $700-billion bailout package for financial institutions laden with toxic assets. The vote sparked global panic, with the S&P 500 index dropping by 9 per cent on that day alone. Over the following month, that benchmark's losses would total a staggering 30 per cent. Within one week, then-president George W. Bush signed subsequent bailout legislation designed to take "troubled assets," such as mortgage-backed securities, off the books of financial institutions, but what would amount to the worst financial crisis since the Great Depression would not reach its nadir for another six months. It would take more than two years for the market to return to its value prior to the Lehman bankruptcy.
Sept. 11, 2001 – Terrorist attacks
The horrifying revelation that the United States was under attack dawned before the stock market was set to ring the opening bell that morning. To prevent a potential market meltdown, the New York Stock Exchange and the Nasdaq were shut down for the rest of the week. The fear was still palpable when they opened for trading the following Monday morning, and the selloff that week was indeed one of the worst on record, as the S&P 500 index ended the week down by 12 per cent. While the political and economic consequences of 9/11 were very much unknown, calm was quickly restored in the stock market, as the main U.S. benchmark regained what was lost within one month.