How the Political Environment Can Create Market Volatility and Affect Investments
By Kathleen Monday January 19, 2021 No Comments
It’s no secret that political events can affect markets and prices. Unlike other unpredictable events, like natural disasters, wars, and inclement weather, political goings-on are a constant source of market changes and adaptations. Why is this so, and what can investors do to protect themselves while maximizing their returns? HighPoint Advisors, LLC explores the relationship between the political environment and financial markets.
How Politics Create Volatility
First, it’s important to have a basic understanding of the causes of fluctuation in market prices. In the simplest sense, securities’ prices rely on the principle of supply and demand. When a lot of people are buying and not many are selling, the price is high. When many people are selling and not many are buying, the price is low. You can already begin to see how events going on in the world can affect prices: if something causes investors to lose confidence that their holdings will continue to have value in the future, they’ll be likely to sell and prices will fall. Likewise, if something happens to bolster their confidence, investors will buy more, causing prices to go up.
Decisions made by politicians have effects on how business is done and how commodities are traded. Foreign and domestic policy changes affecting factors like how goods are taxed, interest rates, government subsidies for a particular product or industry, and others can all have an effect on the stock market. More extreme examples that can cause bigger swings in prices are wars, scandals, and big news events. These factors can create market volatility, or instability in prices. As you may have guessed, the response of investors to unexpected or drastic policy changes or changes in business conditions affect their behavior. But, so do their expectations: investors might center their decisions on the expectations of how a politician might make policies in the future. They are more likely to invest if they perceive that a politician will create a favorable financial landscape during their term, or hold back if they know a politician has expressed the desire to enact policies that might not create favorable market conditions.
Political Uncertainty and Markets
Markets tend to show greater stability when there is a high degree of political stability. When political shake-ups occur, markets tend to show greater volatility. This effect tends to become more pronounced in a weak economy, and furthermore, can cause a kind of feedback loop where unstable market conditions result in political uncertainty. Generally, a more stable political situation results in more favorable market conditions.
One important result of this is that natural instability in political systems, i.e. elections, can have a fairly dramatic effect on markets. Since elections occur so often, ushering in new politicians and pushing out old ones, new market conditions are being created based upon how investors believe policies enacted will affect business. It’s important to make the distinction, however, that politicians and elections don’t cause market volatility; rather, it’s caused by how investors react to these changes.
How You Can Navigate Markets
All of this can seem pretty complicated, or even worrisome. However, with a bit of research and planning, you can learn to make safe investments with regard to the political climate. In fact, the ever-changing nature of politics at home and around the world can help to create opportunities for investors. One of the best ways to navigate the complex world of markets and finance is by collaborating with a financial firm that understands these factors and works with you to pursue your goals. For people in the Central New York area, HighPoint Advisors, LLC offers a number of services from wealth management, to retirement planning, to life insurance, and more. Contact HighPoint Advisors, LLC today to learn more about meeting your financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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