From Headlines to Portfolios: Understanding How International Current Events Affect Market Volatility

How International Current Events Influence Market Volatility

Some international events, such as popular sporting or cultural events, can increase stock market returns by promoting tourism, increasing consumer spending, and fostering strong trade relationships among countries. An example of this positive impact is Taylor Swift’s ongoing Eras Tour, which has significantly elevated economic activity in the United States and abroad. Unfortunately, other international events, such as the COVID-19 pandemic, can devastate the economy and spook skittish investors and stakeholders, causing further swings in the market. Understanding the different ways in which current events around the world can affect your bottom line as an investor will help you stay calm and make informed financial decisions when facing a crisis.

Supply Chain Disruptions

One-way current events can affect market volatility by disrupting businesses’ supply chains. Trade disputes between countries and events that delay the manufacturing or transportation of goods can have far-reaching economic consequences for businesses and consumers. Investors often react to these disruptions with heightened uncertainty or panic, leading to increased market volatility.

Changes in Consumer Demand

Additionally, international and domestic current events can trigger changes in consumer demand. Shifts in public opinion and spending habits, both positive and negative, can dramatically affect a company’s reputation and revenue, subsequently influencing its stock prices. These changes may be temporary and tied to a specific event or season; in some cases, though, they indicate a wider cultural paradigm shift away from a certain business model, public figure, product, or service.

Changes in Currency Exchange Rates

 Currency risk, or exchange-rate risk, comes from changes in the perceived worth of one currency in relation to another. Geopolitical events, trade disputes, war, and natural disasters can increase volatility in a currency’s exchange rate, affecting the profitability and stock prices of businesses that operate within countries that rely on that currency to facilitate transactions. 

Three Strategies to Protect Against Market Volatility

Market volatility can feel scary and overwhelming because of its inherently unpredictable nature and its direct impact on investors’ bottom lines. To many, keeping abreast of the constantly evolving positive and negative financial implications of world events feels impossible. However, panicking and making haphazard, ill-informed decisions in the face of economic uncertainty can have much worse effects on your economic position. Keeping a cool head and employing the following three strategies will help you weather and even thrive through any financial storm.

• • 1. Diversify Your Investments

Market volatility poses the biggest risk to investors whose assets are concentrated in single stocks or only a few economic sectors. If trouble arises that causes a major decline in their investments, they do not have a diversified portfolio to fall back on. This is easily remedied by investing more broadly with mutual funds or index funds that allow you to invest in hundreds or even thousands of companies at once. It’s also a good idea to invest in multiple types of assets that are not tied to the stock market, such as bonds and real estate. Having a diversified portfolio makes it far less likely that your entire nest egg will be on the line in the event of an international tragedy. 

• • 2. Prioritize Long-Term Investing

Investors seeking short-term profits tend to suffer more from market volatility because they may not have the time to wait for markets to recover and may thus be more likely to sell at a loss. Market volatility has been constant throughout the stock market’s history, but the market as a whole still trends upward over the long haul. No loss is locked in until you sell the investment; keeping a long-term perspective can mitigate anxieties over short-term fluctuations and setbacks.  

• • 3. Consider Active Asset Management

Active asset managers have experience navigating volatile markets and can quickly react to unforeseen economic changes and international current events, adapting their investment strategies to reduce risk exposure. In some cases, they can even take advantage of market volatility, exploiting market fluctuations for short-term profits that can add up over time. Active asset managers also do extensive market research, including research into unfolding international events likely to affect the economy. In doing so, they attempt to anticipate changes in the market [PRP1] and adjust their strategies accordingly. Their years of investing experience, coupled with their research and market analysis, can provide insights to which the average busy investor might not otherwise have access.

Conclusion

The specifics of changes in the market can be unpredictable; but the existence of market volatility, the types of events that amplify it, and the risks and opportunities it poses should come as no surprise to savvy investors. All investors will face unforeseen changes in the market at some point in their lives. However, the way that you respond to market volatility and the effectiveness of your overall investing strategy matter much more for your financial well-being than any instance of change in the market.