How Political Events Affect Stocks
Events Influence the Market
Company stock prices and the stock markets in general can be influenced by world events such as war, civil unrest and terrorism. These influences can be direct and indirect and they often occur in chain reactions. For example, the social uncertainty and fear generated by the terrorist attacks on September 11th 2001 affected markets directly as they caused many investors in the United States to trade less and to focus on stocks and bonds with less risk. Indirectly, you can expect the stocks of military equipment companies and weapons manufacturers to rise in value as a nation gears up for armed conflict due to increased demand.
War affects the value of assets above all else. Even the suggestion of a war in the Middle East is often enough for the price of crude oil to sky-rocket due to the region being such a major oil exporter. Oil and stocks have a negative correlation so rising oil prices due to political unrest usually signals falling stock prices, especially those stocks denominated in dollars and energy stocks.
It is perhaps not surprising that some economists point to a potential economic upside to war. War at times can kick-start a fledgling economy especially its manufacturing base when forced to concentrate its efforts on war time production. Think of the United States in World War II. The U.S.’s entry into the war following the attacks on Pearl Harbor almost instantly pulled the country out of the grips of the Great Depression. While there is historical precedent for this viewpoint, most would agree that an improved economy at the cost of human lives is not a choice most would be willing to make.
Other political events which can affect the stock markets are government elections. Elections impact on a country’s currency and are viewed by traders as a case of potential political instability and uncertainty which typically equates to greater volatility in the value of a country’s currency. Unplanned elections can wreak havoc on a currency especially in cases where upheaval among citizens results in protests and work stoppages for example. In most situations, the political instability will outweigh any positive anticipated outcomes from a new government in the short run and related currencies will usually suffer losses. In the long-term, however, basic valuation factors and principals will once again apply and currencies should settle at or around a rate indicative of the country’s economic growth prospects.
Political events can therefore have a profound effect on stock markets and seasoned investors often take advantage of this volatility. While it is very difficult to plan for the unexpected in the markets during these unsettling times, an informed trader will be quicker to react to global events than one who is unsure of what moves to make in their wake. Researching relevant information and following the trends in times of political conflict or uncertainty will allow you to make quick, informed decisions regarding your trading activities so that you can ultimately maximize your profits. Investors hoping to profit in times of volatility can choose regulated binary options broker Banc De Binary as their first point of call.