Political drama isn’t unique to the United States—and in today’s global economy, no matter where in the world it’s occurring, it can play a major role in what happens to the stock market. Case in point: this week's up-and-down stock prices.
The Italian kind (for starters). In short, Italy’s in the midst of a battle between pro-European Union politicians, including current president Sergio Mattarella, and Euro-skeptic populist parties, the Five Star Movement (M5S) and the League. The country is heading for new elections as early as September, which creates an opportunity for anti-establishment parties to gain more ground.
Well, the global concern—not just held by the U.S.—is that the turmoil could result in Italy, the third largest EU economy, leaving the euro. Call it Italexit, Italeave or Quitaly. Whatever cutesy name sticks, the move would be ugly for the eurozone...and the markets at large. Why? The main reason is because the market hates uncertainty—and no one knows exactly what to expect if Italy does in fact leave the EU and/or stops using the euro.
Sure enough, U.S. investors returned from Memorial Day weekend to stumbling stock prices. Major European markets all closed down. And the Dow Jones industrial average, an index that tracks 30 large U.S. stocks, dropped nearly 400 points. By Wednesday, though, stocks had begun to bounce back—before dropping again on Thursday.
We can't blame it all on the Italians. Some volatility is thanks to a different political showdown—this time between the U.S. and its trade partners. On Tuesday, the Trump administration said that $50 billion worth of tariffs against China are actually still on the table. On Thursday, Commerce Secretary Wilbur Ross announced that, despite previous exemptions, the U.S. will impose tariffs on steel and aluminum products from the EU, Mexico and Canada beginning Friday. In response, the EU announced its own plans for retaliatory measures. The Dow ended the day down nearly 252 points, or 1 percent.
Prepare for more volatility, as political turmoil continues here and across the pond. But keep it in perspective, too. Remember Brexit? The Dow’s initial reaction to that huge European story was to dive hundreds of points in a single day. Any investors who panic-sold in response would have missed out on the market’s swift recovery.
“Stock markets move up and down, and the selling seen today could easily give way to buying tomorrow as bargain hunting investors emerge. Investors should resist any urge for a knee-jerk reaction, and instead maintain a long-term perspective,” says Bankrate.com's chief financial analyst Greg McBride.
This post was updated on May 31.