Iraq. The Ukraine. Syria. Gaza.
You name the hot spot. No matter how you slice it, the world’s in a bit of a mess, isn’t it? Right now we’re witnessing tragic and horrible news for ordinary people unlucky enough to live in these places.
But bad news from abroad affects us too. This isn’t 19th Century. The United States can ill afford to consider itself an isolationist nation. Market economies are more interdependent than ever. What happens in Europe and Asia affects our own economy – big time! Global problems are our problems. They have been for a while. Here are 4 reasons why the stock market could easily inherit the brunt of these problems very soon.
Crude oil and natural gas prices could rise and cause stock prices to fall. — Although the United States has made some strides towards energy independence, we’re still dependent on consistent oil exports from the Middle East. Even though we’ve become more of a service economy, and less of a manufacturing economy, most companies – directly or indirectly – need oil and gas to continue to do business. If their energy costs rise, their financial profile — and therefore their stock price – is compromised.
While we’re not as dependent as Europe on a flow of gas and oil from the Ukraine, if the European Union’s economy is challenged, our robust trade activity with it will also be challenged.
Investors will trade less frequently in a time of crisis and stock prices will decline. –The 2011 terrorist attacks in the United States caused investors to trade less. They wanted to stay in cash until they got a bead on how Wall Street would react.
Right now, we have a runaway bull market. But it’s a market running on what financial professionals like to call “the greater fool theory.” Meaning if investors (“fools”) are throwing money at a stock on the assumption that if someone just bought a stock at a current price, there’s always a “greater fool” who will pick up that same stock at an even higher price. A negative world event can turn around that kind of facile optimism on a dime, and the stock can just as easily come crashing down when stock optimists become stock pessimists.
Investors will trade more conservatively in a time of crisis. —When investors are frightened, they instinctively move over to bonds or to hard assets like gold or diamonds as safe havens. It’s always wise to diversify before a world market causes markets to decline.
Investors will move from one kind of company stocks to another in a time of crisis. –During a time of war, the stocks of certain kinds of companies – travel or airline companies, for instance – will decline. Stocks of other kinds of companies – weapons and military supplies, will benefit from the crisis. Again, investors are well advised to allocate stocks in their portfolios before a crisis.
No one can predict the future. And even the most sophisticated fund managers have been caught short. Prudent investors are always best advised to temper even the most aggressive portfolios with safe-haven and conservative assets. Unbridled optimism is never an advisable strategy.