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How do world events affect my personal finances?

We often hear about “fluctuations” in the stock market. What exactly are these, and what causes them? At a time when geopolitical tensions are plunging us into uncertainty, it’s important to learn how the global markets can impact our personal finances. 

Let’s get into it.

Why do stock markets fluctuate?

Stock prices change daily, depending on supply and demand. The price of a stock, for example, is set in part by demand; therefore, the greater the number of buyers, the more the price is likely to rise.

Overall, markets are very sensitive. They can fluctuate due to internal factors within companies, but also depending on the current economic situation. If overall economic growth is strong and the political situation is stable, stock markets will tend to rise. If, on the other hand, the economic or political situation is unstable, the stock markets will tend to fall. We saw this particular situation occur during the Covid-19 crisis, when the S&P 500 collapsed during the March 2020 lockdown.

In general, several factors have an impact on markets:

The health of a given business sector

When a business sector is healthy, it benefits all companies in the industry, and vice versa. This is what’s happening with American tech companies (Facebook, Amazon, Microsoft, etc.), whose prices are reaching record highs. Conversely, when a sector of activity is struggling (for example, because it’s overtaken by a scandal), the stock prices of the companies in that sector will tend to fall.

The economic context

Economic conditions play a crucial role in stock market prices and in our daily lives. Basically, when the economy is doing well, prices tend to rise. This is called an “uptrend”. Conversely, in times of crisis or recession, the markets tend to fall.

Major world events

Major world events, even outside the stock market, can have a massive impact on prices. Examples of events might include a health crisis, the election of a new leader (on Donald Trump’s election day in 2016, global stock markets first crashed before recovering), a war, a climate event, geopolitical tensions, and so on. Any of these events will have a direct impact on our lives, as we are seeing right now with the rise in fuel and raw material prices which are partly due to the situation in Ukraine. Because of this conflict, the price of wheat has increased by 70% since the beginning of the year! Consequently, we’re seeing soaring prices in certain commodities such as bread.

Will I lose money when the stock market fluctuates (because of a global event, for example)?

Stock markets are volatile by nature, and volatility is the measure of the amplitudes of variations of a financial asset, both upwards and downwards.

So, should we be afraid of volatility?

It really all depends on your sensitivity to risk and your investment horizon. The investment (whatever it is) must be considered in the long term, knowing that time is the enemy of risk. Even if you lose money at a given point of time, these losses tend to be smoothed out eventually. Moreover, nothing is ever set in stone! Say you bought 3 shares at $10. Two weeks later, they might only be worth $8. You might think you have lost money, but in reality, as long as you have not sold your shares, you have neither gained nor lost. If you wait another 2 years, it’s quite possible that the value of each share will reach $15 dollars or more!

Moreover, if your money (or at least part of your money) is placed in savings accounts, cash equivalents and money market funds, and fixed income products – you can control against the risk of the more volatile stock markets. This is for good reason; these are investments with guaranteed capital, and there is therefore no risk of loss except for the loss due to inflation.

On the other hand, price fluctuations can directly influence the price of certain raw materials, or even energy. In this case, the entire population is affected, since these fluctuations are reflected in prices. Fortunately, this doesn’t mean that the situation won’t change in the short or medium term!