Stock Market Crash: Could Brexit Be the Catalyst Taking Stocks 20%+ Lower?

Brexit Could Spark a Stock Market CrashBrexit Could Spark a Stock Market Crash

After the U.K. voted to leave the European Union (EU)—a phenomenon known as the “Brexit”—could we now see a stock market crash? Simply put: yes. A massive sell-off could be ahead.

The first and most important fact you have to remember with the Brexit is this: it’s going to create a significant amount of uncertainty.

Stocks do not do well when there’s uncertainty. To no surprise, as the Brexit was confirmed, major stock markets in the U.S. and around the world tumbled.

Please see the chart below of the S&P 500 at the open bell as one example. The S&P 500 plunged 2.5% in a matter of minutes.

s and p 500 large cap index chart 1

Chart courtesy of www.StockCharts.com

The second reason why the stock market could crash is that American companies are exposed to what happens in the global economy. The Brexit has the ability to cause a major slowdown in the global economy. Give it some time and the data will tell us this.

Know this: a significant amount of American companies earn revenue from outside of the U.S. economy. In 2014 for instance, roughly 48% of S&P 500 companies earned revenue from outside of the U.S. (Source: “S&P 500 2014: Global Sales,” S&P Dow Jones Indices, last accessed June 24, 2016.)

Now let me ask you this: Let’s say the U.S. economy remains intact and grows two percent, as the Federal Reserve expects, but the global trajectory derails due to the uncertainty around the Brexit. Would companies on the S&P 500 be able to show higher earnings? Chances are that they will face headwinds and their earnings could significantly decline.

With this, you should also keep in mind that if earnings continue to decline, this could lead to a stock market crash.

The last, but certainly not the least, reason a stock market crash could occur in 2016 is that investors are frustrated with the stock market. The Brexit could cause them to run for the exits and sell.

Consider the chart below of the S&P 500 and pay attention to the circled areas:

s and p 500 large cap index chart 2

Chart courtesy of www.StockCharts.com

You see, if you bought stocks in early 2015 and you were still holding them, you wouldn’t be making any money. Since the beginning of 2015, the S&P 500 has been trading sideways and the trading range is severe, too—it has swung more than 10% at least three times.

You really have to question how long investors can suffer this until they look for other opportunities.

Stock Market Crash: 20% Downside Move Likely?

Truth be told: if you are not careful now, there could be severe damage to your portfolio.

The odds of a major stock market crash are increasing each day. As I see it, with the Brexit vote in, the odds of a major sell-off, in my opinion, are the highest now since 2007—which was when a full-out financial crisis was in play.

Now the big question is this: how low could the stock market crash go?

I will not be shocked if the S&P 500, for instance, drops well below the trading range it has been in for the last year—a 15%–20% decline could be very likely.

Then, you have to watch how investors are behaving. If there isn’t any calm after a 20% decline, it shouldn’t be surprising to see another move downward.