How Geopolitical Factors Could Impact Stock Markets
Geopolitical risk indicator edging higher
The S&P 500 Index (SPX-INDEX) (SPY) plunged 4.6% during the first four trading days of February, while the Dow Jones Industrial Average (DJI-INDEX) (DIA) and the NASDAQ Composite Index (COMP-INDEX) (QQQ) dipped 4.7% and 4.0%, respectively. Notwithstanding the current turmoil in the market, investors need to be aware that additional red flags for markets could erupt from geopolitical factors. Though these factors aren’t expected to play a major role in the near future, they could turn out to be a big factor in the later part of the year.
Markets largely shrugged off geopolitical risks in 2017 to post strong gains amid lower volatility. However, 2018 could prove to be different due to the rising intensity of geopolitical issues. The BGRI (or BlackRock’s Geopolitical Risk Indicator) has now crossed 2017 levels and is well above the recent peak experienced in March 2015. The BGRI measures the regularity at which geopolitical concerns are cited in the media and in brokerage reports.
Interested in DBC? Don't miss the next report.
Receive e-mail alerts for new research on DBC
Impact on economic activities
The rise in geopolitical risk causes trade disruptions and affects free movement of capital, thereby impacting the overall economic activities. It may also cause the prices of commodities (DBC) (GSG) to rise, thus impacting the fundamentals of commodity-dependent countries. The weak economic fundamentals ultimately dampen overall stock returns.
In the next few parts of the series, we’ll discuss geopolitical factors that could derail stock markets in 2018.