Wars, terrorist activities, and strained relations between nations can have profound impacts on global economies, bringing uncertainty to an already fragile economy.
Conflict in the Middle East and Ukraine, a potential government shutdown, no Speaker of the House, and rising interest rates have created a particularly unsettling backdrop for investors. So, how can you protect yourself financially during these uncertain times?
In the midst of recent geopolitical turmoil and economic challenges, many are feeling apprehensive about the state of the financial markets. Last week, the International Monetary Fund warned the world economy has lost momentum from the impact of higher interest rates, the invasion of Ukraine, and widening geopolitical rifts, and it now faces new uncertainty from the war between Israel-Hamas.
Historically, wars have been known to cause market volatility. The outbreak of war often brings a high degree of uncertainty, especially around economic consequences, causing investors to pull back. This, in turn, impacts global trade and supply chains. Geopolitical conflicts can also affect energy prices, government politics, corporate earnings, and more.
It’s important to note that the degree of market volatility during war can vary on a variety of factors, including the scale of the conflict, the geographic location, and the overall economic conditions at the time. Despite the concerns surrounding the economy’s current situation, the market’s response has not been as dire as many have expected. Yet.
Currently, the market's reaction appears to be somewhat less pronounced than expected. In the latest premarket activity, the S&P futures are down slightly over 0.8%, and Nasdaq futures have dipped by 0.8%.
It’s important to remember that markets are known to assess certain risks slowly, and their responses can evolve over time.
Given the recent developments in the Middle East, oil prices have seen an increase of over 4% in premarket trading. Despite this rise, crude oil remains below $90 per barrel currently standing at just over $87. This price point is essential for monitoring inflation pressure.
Additionally, there are lots of conversations about “flight to quality” occurring. Flight to quality occurs when investors in aggregate, begin to shift their asset allocation away from riskier investments and into safer ones. Typically, when this happens, bonds and commodities such as gold rise. Currently, gold is up almost 1% in the premarket, and bond prices have also increased.
The VIX (Volatility Index) has jumped nearly 8% in premarket trading, currently sitting at 19. It’s possible for this to increase as the Israel-Hamas war escalates. This is causing many investors to consider ‘Option Skew’. Option Skew, or ‘Volatility Skew,’ is an options trading concept that refers to the difference in volatility between at-the-money options, in-the-money options, and out-of-the-money options. This involves investors seeking downside protection by buying puts in times of increased downside risk. They will often finance these purchases by selling calls. This strategy changes the relationship between calls and puts and reflects how people hedge against unforeseen events.
Protecting yourself against potential market volatility is an essential aspect of managing your investments and financial well-being. While you cannot eliminate all market risks, you can take several steps to mitigate the impact of market volatility on your portfolio. Here are some strategies to consider:
However, be cautious with stop-loss orders, as they may result in selling assets at a loss during temporary market dips.
Remember that market volatility is a natural part of investing, and it's impossible to eliminate all risks. The key is to have a well-thought-out investment plan, stick to your strategy, and make adjustments when necessary based on your long-term goals and risk tolerance.
Working with financial advisors becomes especially crucial in times of market volatility. Market fluctuations, driven by economic uncertainties, geopolitical events, and unforeseen crises, can be unnerving for investors, especially those close to retirement.
Financial advisors bring their expertise and experience to the table, offering invaluable guidance on how to navigate these turbulent waters. They can help you make informed decisions, create a well-diversified portfolio tailored to your risk tolerance, and devise strategies to help protect your investments during market downturns. Moreover, financial advisors provide the discipline needed to avoid impulsive, emotionally driven actions that can harm your long-term financial goals. By working with a financial advisor, you gain a trusted partner who can help you weather market volatility and stay on track toward achieving your financial objectives.
“In times of uncertainty, it's essential to remain informed and stay the course with your long-term investment objectives. While the financial markets may appear calm amidst the storm, it's always wise to be prepared as you navigate these challenging times. Stay vigilant, stay diversified, and stay focused on your financial goals.”
Here at NJM, our Wealth Preservation Specialist, Nicolas J McLeod, is a true Fiduciary. Both Nic and his talented team operate by a code of ethics that proudly offers you knowledgeable, honest financial advice - as we believe you deserve nothing less.
Having helped thousands of families nationwide, we value our foundation of legal and ethical trust with utmost transparency, and we are ready to help you preserve and grow your wealth for a secure and comfortable financial future.
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