A stock market is an open and public platform for buying and selling shares in publicly-traded companies, making major world events an integral part of its operation and your investments within it.
Global financial systems are interdependent; any event will often cause ripple effects that impact multiple industries simultaneously. For instance, COVID-19 pandemic and its aftermath had an adverse impact on cardboard box prices while increasing them for military equipment manufacturers.
1. Natural Disasters
As natural disasters, artificial disasters, and terrorist incidents increase, more attention has been drawn to their impact on various economic activities such as capital markets. Disasters tend to strike without warning and leave lasting economic damages behind them; research suggests that how vulnerable a population or country is may influence whether that hazard turns into a disaster event; developing countries tend to experience more natural disasters with losses as a proportion of GDP being greater.
At our research facility in Chile, we examined price reactions and volatility around the earthquake of 2011 and discovered a negative correlation between events and stock market movements, in line with findings by previous studies (Worthington & Valadkhani 2004:16; Brounen & Derwall 2010:597; Capelle-Blancard & Laguna 2010:204). Furthermore, this research supports Hypothesis 2 which states that different disaster types will have distinct effects on capital market returns, with some having longer lasting ramifications than others as shown by results from Table 1. These results corroborate earlier findings of Chesney et al (2011) which found: 266
2. Political Upheaval
Politics and government do have an effect on stocks, but should not be the main driver of investment decisions. Instead, investors should concentrate on the outlook for business – since well-run enterprises can withstand political upheaval more readily.
When stocks trade sideways due to uncertainty surrounding political issues, such as new regulations potentially having negative ramifications on companies’ profits, they may drop until its true implications become known.
History indicates that political turmoil will not significantly impede a country’s economic growth in the long-run. A change of leadership won’t cause its economy to shift suddenly in one direction or another – political leaders generally pursue policies tailored toward satisfying constituent needs.
War has historically caused short-term shocks to the stock market, yet shares typically recover quickly after initial drops resulting from conflict. Indeed, production levels often increase to meet military needs during war-time conditions – making defense and energy companies particularly resilient during these volatile times.
On the initial day of Russia/Ukraine conflict, both the FTSE and Dow suffered, but markets have since recovered to remain relatively stable. Countries with stronger trade ties to Russia/Ukraine tend to experience greater volatility than those without such links due to higher energy prices caused by damage at oil extraction and refinery sites which causes production to either slow or stop completely.
Terrorist attacks produce fear and uncertainty among citizens, slowing economic development. Their acts of violence also have far-reaching effects on global financial markets; an attack in one country may affect traders and investors worldwide.
Terrorism affects macro-economic variables like GDP, exchange rate, stock markets and foreign investment negatively. The specific impacts depend on whether terrorist attacks target law enforcement agencies, civilians or special places – attacks directed against latter two categories tend to have more lasting repercussions for markets than attacks targeting law enforcement agencies; both attacks will still have short-run impacts due to increased security concerns that prompt people to look for safe places where they can invest their funds.
Since forever, unemployment and stock market prices have been inextricably linked. When unemployment rises, economic activity weakens and corporate profits decrease – all factors which are likely to have an adverse effect on stock prices.
However, when unemployment levels drop significantly, economic conditions improve and corporate profits could see significant gains, potentially making stocks more attractive to trade. Therefore, it is crucial that traders keep an eye on unemployment rates when analyzing stocks to trade.
Low unemployment levels often signal that the economy has reached its maximum expansion and could soon enter recession, so although low unemployment may be good news for the economy and stock markets, it might not necessarily signal good investment returns – it’s important to look at both numbers and trends when making investment decisions.