Global financial markets reacted emotionally over Britain's surprise decision on Friday to exit the European Union, with U.S. stocks plunging to three-month lows. That's exactly what investors, particularly individual and non-institutional investors, shouldn't do: panic!
Instead, it's one of those times to seize opportunities when the stock market swings virtually out of control. In other words, buy the fundamentally sound stocks that have suddenly plunged by 3 percent to 8 percent -- the stocks that you have always wanted to own -- and ignore the noise and headlines that appear worrisome.
Of course, there are those who would advise jumping ship and bailing out of the markets, warning that the worst is yet to come as a result of the U.K.'s splitting from Europe. The market has been bombarded by dire warnings of gloom and doom in the past, but just take a look at how much higher the Dow and the S&P 500 have gone up since those periods of panic.
"Uncertainty, and sensational interviews on financial media, reigns," said Sam Stovall, managing director of U.S. and equity strategist at S&P Global Market Intelligence, in a note to clients. "Warnings will abound that the U.K. will fall into recession, and questions will be raised about the economic health of the remaining E.U.," he added.
Here's Stovall's calming advice to nervous investors: "Overall, I would recommend that investors think more about buying than bailing by developing a buy list, such as the S&P Dividend Aristocrats with 4- and 5-STARS that fall to the point that they yield 4 percent or more."
Unlike many analysts, Stovall doesn't think the U.K. will plunge into recession following the country's historic "Brexit" vote, as the referendum has been dubbed. He also expects the U.S. and Europe to avoid a downturn. And on the question of what happens to the U.K.'s trading with Europe, he pointed out that trade agreements remain in force until Parliament votes to leave the political and economic bloc.
"In addition, the Bank of England has pledged 250 billion pounds to support capital markets," he noted. Bottom line, "make sure you don't end up becoming your own worst enemy" by trading on emotion, Stovall advised.
"We're seeing a classic market overreaction, and such an emotional response presents a attractive buying opportunity for long-term investors," said Greg McBride, chief financial analyst at Bankrate.com. "U.S. financials in particular stand out as a buying opportunity with today's volatility," he added, as "there isn't anything fundamentally different to warrant their lower prices, especially with most of the banks passing the stress tests yesterday (Thursday)."
McBride laments that the market's reaction is being driven by "fear and uncertainty rather than fundamentals, but over the long-term it is the fundamentals that drive asset prices," he said.
Some of the companies that appeared to be hit the hardest by such emotional trading are banks and other financial institutions which, to be sure, have become truly underpriced and should be attractive buys. Citigroup (C) tumbled 7.7 percent on Friday to $41 a share, J.P. Morgan (JPM) dropped 4.8 percent to $60.95, Bank of America (BAC) fell 5.9 percent to $13.21, and Wells Fargo (WFC) fell 3.85 to $46.06.
Many of the so-called momentum stocks that also suffered big losses -- though not as badly as the banks -- included Apple (AAPL), which dropped 2.37 percent to more than $93 a share; Facebook (FB), down 1.7 percent to over $113; Alphabet (GOOG), nearly 3 percent to over $693; and Microsoft (MSFT), 3.2 percent to $50.24.
And some firebrand stocks now look like attractive buys, such as Amazon.com (AMZN), which lost 2.5 percent to more than $703 a share, and Netflix (NFLX), which declined 2.3 percent to $89.47. Auto stocks are now also selling at huge bargain prices: General Motors (GM) dropped nearly 4 percent to over $28, and Ford Motor (F) slide almost 6 percent to $12.60. Obviously, their sharp pullback doesn't involve any fundamental factors.
Indeed, market turbulence will be widely felt, but it could also create "significant opportunities for bottom-up, fundamental investors," noted T. Rowe Price in a message to clients. The key to navigating the "difficult period ahead will be the ability to identify the sectors and individual companies that will be hit hardest by Britain leaving the EU -- and those who might ultimately benefit from it," said Ben Griffiths, T. Rowe Price's portfolio manager for European small-cap equities.
Given the lack of clarity on what the post-Brexit environment will look like, "Market volatility is likely to be broad-based in the short-term," Griffiths said. But even in such an environment, he noted that "there will still be quality companies that are relatively immune to a downturn -- those with innovative technologies, leading players in niche markets, or those with dominant products or brands."
Chris Gaffney, president of World Markets EverBank, noted that the market's Brexit-induced swings "provides opportunities for those willing to take the risk."
The lesson, as the fallout from Brexit continues, is that investors should always be open to seizing opportunities whenever they appear -- especially when they become so underpriced or undervalued for reasons that have little to do with fundamentally anchored factors.