The political turmoil in Ukraine between Russia, the European Union, and the United States has put the world on alert as the threat of war increases. As we have seen in the market when peace summits are called, the market reacts positively and when Putin invades Crimea the market reacts negatively. Many of us focus on the micro side of the market, the internal performance of a company. However, it is just as important to understand how macro events affect the market.
In today’s increasingly international business climate we have to follow news from around the world and watch for connections to companies or industries. The smallest political change in a foreign country may have drastic affects on a company in the U.S., though these connections are so small many people miss them until the price of a company drops unexpectedly.
Even professional investors cannot understand the full affects of a changing political climate and as a result they divest from risky ventures like stocks and options and put it more conservative securities and this is what drops the market. So when the international political scheme begins to change, the market is not down on a fundamental level; it is repressed by fear and uncertainty. Uncertainty is what drives bear markets while predictability drives bull ones.
You may be asking yourself, how do I respond to international political unrest? Following three simple steps you can logically predict, react, and understand international political turmoil and how it affects your portfolio.
So number one, watch international political news. While you may not see how elections in Liberia or a new tax in Dubai may affect you, rest assured they do. Every publically traded company releases annual reports; in addition to accounting information, they also discuss the goals and opportunities that the company is pursuing, so take note of where the company is doing business.
A new policy in a foreign country may derail a U.S. company’s interests there, dropping their share price. Secondly, if you follow the news and can make the connections from policy to the market, you can now react and exploit the markets shifts. If you are vigilant, you may be able to predict how the market will react and beat many of the less attentive investors.
For instance, a smart investor may have seen the turmoil in Ukraine and the unpredictability of Vladimir Putin and not only divested from Russia but bought contrarian shares so that when uncertainty set in the market would drop and you would make money.
Lastly, we have to understand that if you miss a connection and your portfolio takes a hit, it won’t last forever. Markets lean towards order, not chaos, and people will naturally replace uncertainty with predictability and replace bear markets with bull markets. So if war breaks out, and you lose 5% or more, do not sell it all and run to bonds; remember that the market always comes back, and then buy more while it’s cheap.