Market Volatility and Instability
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Market volatility refers to the speed and magnitude of price swings among stocks or indexes in response to economic activity both positive and negative, including globalization and any subsequent trade wars.
Market volatility doesn’t automatically equate to risk for investors; rather, it can signal greater uncertainty among them. There are various strategies available to you that will allow you to manage market volatility and still achieve your financial goals.
Economic Uncertainty
Economic uncertainty refers to the range of potential outcomes for a country’s economy, which encompasses both known unknowns – those things known to be true – and unknown unknowns – those things which could become true but haven’t materialized (Knightian uncertainty).
Measures can be taken to gauge economic uncertainty. One method involves employing econometric-based measures. These involve gathering survey responses from households, businesses and market participants asking about inflation, output and labor forecasts as well as any other aspects that could contribute to an index that measures economic uncertainty.
As frightening as it can be to see stock prices drop 4%-5% overnight, investors need to stay calm and focus on their long-term investing plan. Over time, shares will likely recover and return to previous levels; however, the path ahead could be more uncertain due to growing global economic uncertainties.
Interest Rate Changes
Interest rate fluctuations can create market turmoil, particularly when they affect fixed-income investments like bonds. Rising rates may decrease existing bonds’ values as they compete with newer offerings with higher rates – leading to investment losses for bondholders.
Financial markets also impact employment by changing the price of money. When interest rates rise, corporations may find it more costly to raise capital through issuing stock or bonds – potentially discouraging them from hiring employees or investing in new projects.
Financial market fluctuations may not be ideal, but they’re temporary. Learning what causes market volatility can help keep your emotions under control and stay focused on long-term goals. Furthermore, having a well-developed financial plan gives you the resources necessary to navigate market turbulence without making hasty decisions that might threaten future returns for your portfolio.
Political Uncertainty
Political events can cause market instability at both a national and local level, including elections or threats of war. Changes in leadership or threats of conflict may disrupt economies and investor trust; while economic issues such as inflation or slowing economies also increase political uncertainty.
These events can cause stock values to either surge or plummet, which causes investors to panic and increase demand for safe investments like US Treasury bonds – creating an outsized difference in yield between them and standard bonds.
Political uncertainty can be an ongoing source of worry for businesses. A study revealed that firms exposed to high political risks tend to increase their short-term operating investment or working capital for greater financial flexibility during uncertain times; according to its authors, this represents their attempts at anticipating government policy changes.
Company Performance
Market volatility is an integral component of investing and may be caused by external factors such as world events, changes to monetary policy or political decisions. Remaining committed to your long-term strategy during these moments of volatility can help ensure greater long-term returns.
High market volatility often manifests itself during bear markets, when markets are trending downward. This may be caused by economic slowdowns and recessions as well as political upheaval, wars or tariffs which disrupt supply networks or lower corporate profitability causing volatility to surge further.
Manage investment risk isn’t easy, but you can prepare yourself for times of market instability by keeping an eye on economic indicators and conducting fundamental analyses on companies you hold. Public also has a network of fellow investors you can tap for support or attend Townhalls with founders or C-Suite executives for additional insight.
