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Why politics rather than economics could derail stock markets in 2018

After the disappointment of the financial crisis, the bull market from 2009 to present has been a welcome event for investors across the globe. It has helped to ease the pain felt by many investors in what proved to be one of the biggest recessions faced by the global economy.

Of course, history shows that a bear market is never too far away. However, at the present time the global economy appears to be in relatively good shape. GDP growth is relatively high and monetary policies across the world remain generally accommodative.

In fact, it appears as though it could be political risks rather than economic ones that could hurt the progress of the current bull market in 2018.

North Korea

The situation regarding North Korea continues to be a significant risk to investors across the globe. Although it has not been at the top of news coverage of late, little has changed in terms of North Korea seeking to develop nuclear weapons and the US (and other countries) being vehemently opposed to this. In fact, the chances of military action seem to be just as high as they have been in recent months. Should the situation escalate then it seems highly likely that it will cause investor sentiment to decline. This could easily prompt the start of a more difficult period for share prices.

Europe

Brexit remains a major challenge for the European economy. At the present time, there remains a distinct possibility of a ‘no deal’ scenario. This could cause significant uncertainty among investors. And even if a deal is signed, the chances are that Brexit will continue to be viewed as a potential threat to stability and growth in the region. After all, unwinding decades of economic and political ties in just a couple of years is certain to be a difficult process.

Certainly, Brexit could be a positive catalyst on the UK and European economies. However, with major change often comes major uncertainty among investors. As such, it would be unsurprising for Brexit to keep global share prices pegged back to at least some extent – especially if brisk progress on a potential deal is not made in 2018.

US uncertainty

The situation in the US political scene may also hurt share prices in 2018. President Trump’s tax and spending plans may cause a degree of uncertainty, since they may prove to be inflationary. This could cause a sharper rise in interest rates than is currently being priced in by the market, as the Federal Reserve may seek to cool inflationary pressures. The end result of this may be a less certain economic outlook which has been caused by a different political ideology.

Takeaway

While there is always the potential for economic weakness, in 2018 there seem to be a number of major political risks which could impact negatively on the performance of the global economy. As such, investors may wish to obtain wide margins of safety in new share purchases at the present time.

Beating the market in 2018

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