Stock Markets declined today. Information surfaced regarding President Trump asking former FBI director, James Comey, to prematurely end a federal investigation into Michael Flynn. Flynn was President Trumps’ former National Security Adviser who left amidst allegations of improper relations with Russia.
The current political climate has created enormous uncertainty for the future. Bloomberg has even described the Trump-Comey debacle as the deepest crisis of Trump’s presidency thus far. Democrats are claiming the president obstructed justice. The White House vehemently denies that Trump ever told Comey to curtail his investigation. Meanwhile, Trump’s own son is claiming the contrary.
So what does this uncertainty mean for your stock portfolio?
There are many places where uncertainty is welcomed, but the financial markets are not one of them. This is an important concept in achieving financial fluency. Uncertainty produces volatility, which marks the rapid and unpredictable swing of prices in any direction. Clearly, these price movements are frightening and can erase or create massive amounts of money, wreaking havoc on individual’s portfolios. For this reason, traders track multiple metrics to gauge volatility. The most common metric is the VIX. The VIX is commonly referred to as the “fear” index because volatility emerges when investors are risk-averse (“scared”).
Today the VIX was up 22%. This represents the largest spike since September of last year. The markets were accordingly hammered amidst speculation of impeachment, economic slowdown, and uncertainty. The S&P 500, which tracks 500 of the largest publicly-traded US companies, fell close to 2% – the most since March. Gold prices rose more than 2% as investors bought safe haven assets which are appealing in times of high volatility. Fear is dominating investor’s minds.
Welcome to Volatility
Now to some, this may not seem fair. At the time of writing, Apple’s (AAPL) stock is down 3.4%. That implies that the company is worth approximately $30 billion less than it was yesterday. Warren Buffet was the one who famously stated that we should be greedy when other’s are fearful; but like any investment, there is always risk.
If this crisis comes to pass, markets will likely rebound. Doubling down on your investments in a time of low prices could be incredibly profitable. Conversely, if this political turmoil stalls Congress from passing Trump’s economic agenda, prices could plummet. This is what people are fearful about. This is why the markets are at their lowest levels in over two months.
The Bottom Line:
Impeachment is a great sound bite for our episodic media cycle; but let’s remember: Republicans demanded President Obama’s impeachment when he took office as well.
This is not to the say that the two presidents are comparable. Neither would agree with the statement. That is to say only that investing is a long-term game. Fear can cause investors to act irrationally. This presents buying & shorting opportunities amidst the madness.
In case you missed it…. Check out our recent post about the G20 and if global leaders (and investors) are chasing an elusive dream
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