The global economy is all interconnected in a very close network. One event in one part of the world can have drastic impact on another part. A decline in the Eurozone markets will cause a decline in the Dow and S&P 500. These interconnections are really important to keep in mind as you pursue stock market investment strategies.
That’s not such a great thing because diversification is all based on correlations. You basically want to be in different asset classes so that a single event doesn’t tank your entire portfolio. You can read more about diversification and asset allocation at Finance World. But in the meantime, let me tell you that correlations are not good right now in the financial markets.
That means the stock market, commodities market, gold, bonds, Treasuries, etc. are all riding on just a few major global events right now. Here are some of the major world current events that are affecting the markets in a huge way.
The turmoil in the Middle East is one. It is primarily affecting oil prices, which ripples throughout the entire world since it’s such a central commodity.
Then you have the debt crisis going on in the Eurozone. Greece is in trouble and in spite of the bailouts, you still are going to have defaults there. Greece is not the only culprit. You also have Portugal, Spain and even Belgium involved.
The other huge factor is the economic recovery in the US. It seems to be softening and that means trouble for the entire world. The question is whether the Fed will bailout the US economy, hence bailing out the world. I can say this. If there is a double dip recession, the Fed will no doubt step in, no matter what the cost is to the value of the US dollar. Currency valuations is a long term problem. Jobs are the short term emergency.