In today’s interconnected world, where information travels at lightning speed and economies are increasingly interdependent, it’s crucial to understand how different events around the globe can influence the stock markets.
This blog aims to provide a simplified explanation of this complex phenomenon, making it accessible even to young readers.
But before we delve deeper we will first understand how stock markets work to understand the basic premise.
How do stock markets work?
Stock markets serve as platforms where individuals and businesses can buy and sell shares of publicly traded companies. These exchanges exist all around the world, such as the National Stock Exchange (NSE) in India, New York Stock Exchange (NYSE) in the United States, and the London Stock Exchange (LSE) in the United Kingdom.
The global nature of stock markets is a result of globalization, where countries are increasingly interconnected through trade and finance. So if one country is facing any issue then the whole world will be affected by it in some or the other ways (especially their economies and hence the stock markets).
Now that you have understood the underlying context of globalization and how it affects the stock markets across the world, you might have a question in your mind ”Are there events which happen on a regular basis and affect the stock markets?”
The answer is “ YES”
Let us understand them in detail to get a better understanding.
Recurring Events Which Affect Stock Markets Globally
Certain events occur repeatedly across the globe, affecting stock markets worldwide. These events are a part of the economic cycle. Here are examples of such events
1. Economic Reports
The release of economic indicators, such as unemployment rates, inflation data, and GDP growth figures, can significantly impact stock markets. Positive reports often lead to increased investor confidence, which may result in rising stock prices and vice versa.
2. Corporate Earnings Announcements
When companies publicly disclose their financial results, it can cause stock prices to rise or fall depending on whether the earnings exceed or fall short of market expectations. Investors closely watch these announcements to make informed decisions.
3. Central Bank Decisions
Actions taken by central banks, such as interest rate changes or quantitative tightening/easing programs, can have a profound impact on stock markets. These decisions influence borrowing costs, currency values, and overall market sentiment.
The events mentioned above can be predicted and investors can prepare for them. But there are also unexpected events that can happen and disrupt the global markets. These events are difficult to predict and can have a big impact on the stock market.
They are called the “Black Swan Events”.
A black swan event is an unexpected event that has a big impact. People often think that these events were predictable in hindsight, but that’s not always the case. The unpredictable nature of black swan events is often what makes them so powerful and hence they heavily disrupt the global economy and stock markets.
Black Swan Events that Shook the Global Markets
Throughout history, certain black swan events have had a significant impact on stock markets worldwide as well as on Indian markets.
1. Dot-Com Bubble Burst (2000)
During the late 1990s, the rapid rise of internet-related companies led to a speculative frenzy in the stock market. However, in 2000, the bubble burst, causing stock prices to collapse and resulting in significant losses for investors.
The Nifty 50 index fell by a total of 45.3% between February 17, 2000, and April 17, 2003, during this period. The index reached its peak of 1718 on February 17, 2000, and its lowest point of 940 on April 17, 2003.
2. Global Financial Crisis (2008)
The collapse of Lehman Brothers in 2008 triggered a global financial crisis. Lehman Brothers was the fourth-largest investment bank in the United States at the time. Its downfall was primarily due to its heavy involvement in the subprime mortgage market, which was in a state of collapse.
As the housing bubble burst, Lehman Brothers found itself holding onto a vast amount of “toxic” assets, mainly in the form of mortgage-backed securities. As the value of these assets plummeted, so did the bank’s fortunes
Stock markets across the world experienced steep declines, and the crisis had far-reaching effects on the global economy, leading to a prolonged recession.
The Nifty 50 index fell by a total of 52.1% between October 9, 2007, and March 9, 2009, during the Global Financial Crisis. The index reached its peak of 5,432.95 on October 9, 2007, and its lowest point of 2,605.35 on March 9, 2009.
3.The COVID-19 Pandemic (2020)
The COVID-19 pandemic has had a significant impact on the global stock markets. The pandemic caused a sell-off in stocks, and the Dow Jones Industrial Average fell by 12.9% on March 12, 2020. The pandemic also led to a global recession.
The Nifty 50 index fell by a total of 39.07% between February 19, 2020, and March 23, 2020, during the COVID-19 pandemic. The index reached its peak of 12,328.85 on February 19, 2020, and its lowest point of 7,436.50 on March 23, 2020.
Global events, both recurrent and black swan, play a vital role in shaping stock market behavior. By understanding the impact of economic reports, corporate earnings, central bank decisions, and black swan events, investors can make informed decisions.
It’s important to stay informed and monitor these events as part of a comprehensive investment strategy.
Remember, while stock markets can be influenced by various factors, maintaining a long-term perspective and diversifying investments can help mitigate risks and capitalize on opportunities in the ever-changing global landscape.