Most people don’t know that the stock market is heavily influenced by what happens in other parts of the world. Many powerful and influential forces are at work, and often what occurs far away can affect your portfolio. It applies to investments and stocks and commodities, real estate, and even local bonds. So what we think we know about global events affecting our investment decisions may not be entirely accurate or complete.
The impact of global events
The two most important factors that drive global markets are supply and demand and how those forces affect currency exchange rates – which then impact all asset classes. For example, there might be a spike in oil prices due to a terrorist attack somewhere in the Middle East – now things get interesting. Oil prices go up, and in response, the dollar weakens.
The weak dollar makes U.S. stocks more attractive to foreign investors, so there is a surge of buying activity in the stock market, which drives prices even higher – suitable for domestic investors with stock portfolios. However, when oil prices rise, this puts pressure on inflation and interest rates which means the Fed may hike rates sooner than expected – bad news for bonds and costly mortgages.
Who it affects matters
Saudi Arabia is one of the world’s largest producers of oil but also consumes a lot itself. If Saudi doesn’t step up oil production during times of high demand, it could cause an embargo or supply disruption, which would cause a significant spike in oil prices worldwide. It will then pull up the dollar’s value, which will cause U.S. stocks to fall as foreign investors sell out and convert their dollars into other currencies.
So, for example, if a terrorist attack occurs in Saudi Arabia – oil prices will spike, which means the dollar weakens. At some point, U.S. stocks will drop sharply due to the weaker dollar and then later fade because of higher inflation and interest rates brought on by supply issues with oil. It’s why global events can affect your stock portfolio so profoundly.
It’s just one example or scenario that can occur due to impact from an event happening somewhere else in the world, such as an embargo or an act of war. Another example is some natural disasters such as tsunami, earthquakes, hurricanes, or volcanic eruptions. Each event can send shockwaves throughout global markets and cause some assets to skyrocket while others plummet.
Be aware and be careful
The point is that what happens in one part of the world can impact you and your assets in another. So if you’re unaware of global events around the corner, then you could unknowingly make investment choices that are less than successful. It’s essential to know how powerful other countries’ economies are and what kind of political climate they have – this will affect supply and demand for all sorts of products, which will eventually move markets. But it’s also critical to understand other markets’ currencies because that plays into foreign investments.
Keeping up with global politics; what wars or conflicts are arising; who is involved; who might become involved? Are there any embargoes on specific countries? Are there natural disasters like earthquakes or volcanic eruptions? Either way, global political and economic situations can have adverse effects on your stock portfolio.
This is why it’s so important to be aware of what is going on in the world today; staying educated and up-to-date with current events will go a long way toward helping you protect your assets and improve your profits down the road. Also, paying attention to how other countries’ economies affect yours (and vice versa) can help you make better decisions about where to invest now as well as which markets might look suitable for future investments.
Being aware of what might happen based upon present circumstances may give you some insights into which areas of your portfolio could see an increase or decrease over time as a result. It means you won’t want to put all your eggs in one basket – you’ll spread out your risk so that if one market tanks, it doesn’t completely wipe out your investments.