Did you know that people spend about $19 billion on stock and commodity exchanges every year in the United States alone? On top of that, this market has been growing by about 2.4% each year since 2018.
Of course, people might pay even more attention to the stock market if they had some idea of how to predict it. Although the stock market is often mysterious, it is clear that geopolitical events can have a huge impact on it.
This applies to a wide range of geopolitical events, including war, energy shortages, economic difficulties, and more. In principle, this means that it is important to watch the latest news to inform your stock market investment strategy.
Savvy investors learn to make stock trades based on the latest reporting on geopolitical events. But how exactly do geopolitical events impact stock trading?
Read on to learn all about some of the biggest ways that the stock market responds to geopolitical events!
How Financial Markets Respond to War
Some people have heard the idea that war is good for the economy. However, we have a lot of data points we can consider to understand how war tends to affect the stock market. In fact, since World War II, there have been 18 acts of war that have had a significant effect on stock and equity markets.
In each case, the stock market took an immediate hit following the announcement of an act of war. That is a clear indicator that geopolitical events like war can have a significant and negative effect on the stock market.
However, there is a lot more to understand about how acts of war affect the stock market. For one thing, it is worth noting that the stock market always recovers from these acts of war. In fact, in the majority of cases, the stock market returns to where it was before the act of war within only a few days or weeks.
In other words, although acts of war do have a consistently negative effect on the stock market, the effect is not as large as you might imagine.
There are a couple of exceptions to this general pattern, though. Two major acts of war in recent decades led to significant disruptions in energy markets.
In these cases, the stock market took much longer to recover. In fact, in the case of the Yom Kippur War, the stock market took a full 6 years to return to where it was before the war began. However, this may have had more to do with energy availability than with the war itself.
The Effects of the Pandemic on Stock Trading
A lot of people got the opportunity to watch the effects of a major geopolitical event on the stock market in the past few years. Many people started taking the coronavirus pandemic seriously in March of 2020. During that month, the stock market took a huge dive that had a lot of people concerned about the future.
However, we saw that the market recovered stronger than ever within only a year or so.
In many cases, the effects of geopolitical events on the stock market are about uncertainty. The possibility that the economy might collapse causes the stock market to take a huge dive. However, the reality so far has always been that these geopolitical events do not lead to utter disaster.
Instead, the market recovers, often faster than expected.
It is also worth noting what happened in the months leading up to the Coronavirus pandemic. Although we do not always talk as much about this, the stock market was diving lower and lower in the weeks and months leading up to the pandemic. Although the world at large did not take the pandemic seriously for a while, this may indicate that the wisdom of the market was able to pick up on the incoming crisis.
Stock Market Performance and Energy Shortages
As we have discussed, energy shortages can sometimes have a bigger effect on the stock market than acts of war. We can look at the war between Russia and Ukraine to understand this dynamic better.
The stock market took a significant hit following the invasion of Ukraine. However, it was only later on that the world started to experience energy shortages.
As a response to Russia’s aggression, many countries refused to trade with Russia. As it turns out, Russia was one of the major providers of energy to the world. By refusing to trade with Russia, many countries have ended up facing significant energy shortages.
Although it is often impossible to explain exactly why the stock market moves the way it does, there is some evidence that these energy shortages have had a larger effect on the stock market than the war between Russia and Ukraine itself.
Forex Trading and Economic Strife
When countries face major economic problems, the value of their currencies often goes down. We got to see this dynamic play itself out several years ago in Greece. When this happens, there is a natural dip in Forex trading.
With so many geopolitical events occurring all the time, it can be difficult to track them all. Tools like Economic Calendar can help you stay up to date on the events that might influence your stock market investment strategy.
Understand the Effects of Geopolitical Events on Stock Trading
We hope that learning more about how geopolitical events can affect stock trading has been interesting to you. The more you learn about how the stock market relates to events around the world, the easier it will be for you to update your investment strategy. Some of the most successful inventors on the planet succeed by paying close attention to the latest news about geopolitical events.
To learn more about the latest information in investment, finance, and more, take a look at our other articles on our blog!
