Life is fluid, ever-changing. Thus, the planet’s overall geopolitical situation morphs from year to year, dramatically affecting global industries. Naturally, these developments impact the stock market and how people trade fixed assets and commodities, lowering the appeal of some and increasing the desirability of others.
That facilitates the need for unique trading strategies in conflict times that attempt to ensure that a portfolio has the potential to at least remain level until a crisis passes. What follows is a short analysis regarding how geopolitical stability agitates the stock market, and below, a few tips also get listed that outline what many think are the best trading courses of action when the world seems at a crossroads.
The Impact of the Ukraine-Russia Crises
When war breaks out anywhere, a sense of uncertainty enters the air, and many governments get forced to increase their defense spending, which can have a sizable influence on stock markets and economic growth in various regions. For example, the US spent over $6 trillion on wars post 9/11. That is a sizable piece of the country’s GDP. Money poured into specific companies that profited immensely from the correlating military clashes and financially swelled considerably as a consequence.
Currently, the entire world has gotten engrossed in the Ukraine-Russia war conflict, which has resulted in short-term global market volatility, as the disruption of Russia’s energy export stream has significantly contributed to rising food and energy prices. But, it should be noted that this is a problem mainly prevalent in Europe, whose economy will likely suffer the most from it.
The layperson believed that the US should remain relatively insulated from this crisis due to its geographical location and little trading ties with the world’s largest country. Yet, in early March, the US stock market dived into account of another substantial leap in oil prices fueled by the Ukraine-Russia conflict, which now threatens to put a squeeze, an inflation grip on the planet’s economy.
Crude oil hit a fourteen-year high in March of this year, causing the International Energy Agency to release over sixty million oil barrels from its global reserves. It did so to ease some of the momentary supply constraints emerging from the Ukraine-Russia conflict. Moreover, its executive director Fatih Birol warned that global energy security is under threat, which puts economies in a fragile state, with a risk that many may not be able to mount a healthy recovery.
Although Russia’s economy is only one-twentieth of the US one and one fifteen of China’s, it provides 10% of the planet’s energy and 50% of Europe’s. Hence, the sanctions recently enforced on Russia from multiple countries and the associated growing geopolitical uncertainty will inadvertently cause market volatility worldwide.
That shows how, at times, trading can be similar to gambling, as explained by OnlineUnitedStatesCasinos.com. One sector’s or company’s prospects can look massively positive one day, but an unpredictable wide-scale war can send them plummeting both in the short and long term.
How to Invest When Sizeable Inflation Looms
In December 2023, consumer prices rose by 7% in the US compared to the year prior. That marked the highest US inflation rate in forty years, an outcome many predicted due to a trend of soaring customer demand and a shortage of supply and labor.
While, at the start of 2023, most analysts assumed that the inflation rate would probably exceed 3% by the end of the year, the current forecast puts it at 7.9%. In all honesty, it is tough to accurately predict future inflation rates, as if the Ukraine-Russia conflict escalates, it could have even more wide-reaching effects than what it has now. It can increase the prices of all goods and services everywhere.
As a rule of thumb, tangible assets such as commodities and real estate get seen as primer inflation hedges for investment in trying times. Know that high-dividend-paying stocks tend to get hammered in inflationary times, as do fixed-rate bonds. So, most investors should consider obtaining a chunk of companies that have the option to pass a massive part of their input expenses into their customer/user bases.
These operate in consumer staples, such as the food, tobacco, beverage, personal, and house product industries. Entities in this field can price their items higher and ride the inflation wave more successfully, as what they provide is a necessity. According to Warrant Buffet, during inflation, it is always wise to put money into businesses with low capital needs that can spike prices of products if needed.
It is also essential to never panic, as current inflation issues may be transitory. Therefore, not correctly assessing the involved inflation dangers can produce undesirable results in the long haul. Sudden moves that seem appropriate during an inflation period may hurt a stock’s performance when the inflation drops. Diversification is a quality approach in virtually all scenarios, regardless of whether stable or rising inflation is in play.
Do Large-Scale Conflits Cause Global Recessions?
Undoubtedly, the current rising stock market volatility reflects multiple investor concerns. But, the higher volatility and inflation pressures by themselves are unlikely to generate a new recession in the United States. Though Europe risks one. The US economy should expect to see its GDP rise by 3.2% this year, even though much remains unknown concerning how the country will respond to its national gasoline prices reaching more than $4 per gallon.
In general, aside from the cost of human life, wars have extensive economic effects, causing damage to transportation infrastructure, a decline in labor, disruption in regular economic activity, negative psychological repercussions, and more. The Iraq War, even though it did not take place on US soil, imposed drastic costs on the country’s economy. It incurred military spending that eventually produced a bill of over $90 billion within a decade.
Victor Niederhoffer, the renowned hedge fund manager, noted in one of his works titled The Analysis of World Events and Stock Prices, published in the Journal of Business, that major political events negatively affect stock prices one to two days following their occurrence. By day two to five, they begin to display a rising tendency.
That illustrates how general unease impacts everything. Given that wars have such wide-reaching consequences, they pretty much always get followed by economic slowdowns or recessions. Since, every year, we get one step closer to living in a global society, the effects of military conflicts are more far-ranging as time passes.
The best tactic for investing in a recession is to avoid companies that appear to be highly-leveraged, speculative, or potentially cyclical. Well-managed entities with a good cash flow, strong balance sheets, and low debt are the way to go. Discount retailers are a quality pick. Also, counter-cyclical stocks experience price appreciation usually despite economic headwinds. So, they do well in recessions.