The Domino Effect: How Global Events Impact Markets

You have likely seen videos of a child setting up a series of rectangular plastic pieces, only to topple them over. This is a game known as dominoes, where there is a starting piece which, when toppled over, causes the remaining pieces to topple over as well. Our lives can be compared to this game. Every decision we make sparks a chain of events that branch out, causing additional chains of events that continue to branch out indefinitely. This is what we call the butterfly effect, a vast concept. The domino effect, you could say, is a sub-part of that, as it causes events without branching out, looking at only one chain of events

As such we focus on the domino effect of global markets. Markets are a place where we buy/sell and exchange goods and services. This happens on a global scale around the world and allows trade between countries. Transport is essential and thus are the supply chains which act like blood to sustain global markets. Consequently, we could use raw materials from all over the world in a single place to manufacture and transport anywhere in the world. But if someone were to disturb this supply chain, products which would be essential would not be available, and could hinder work, life and development. This has negative ramifications all over the world.

The domino effect allows us to see trends before it occurs. Think of yourself as a domino placed in a structure; when the dominoes are being toppled you can hear and see the remaining dominoes toppling over around you, depending on how far you are from the initial event. While the event is going to affect you, you can take action to be ready for it. If we look at world events we can understand the kind of impact this has on you.

Disruption in Everyday Life

Currently, two major wars are going on in 2023 - the Russia-Ukraine war and the Israel-Hamas war. The indicators of the Ukraine-Russia war were seen early on when Russia started stockpiling certain commodities as noticed. This led to tensions and Russia being a major part of the oil trade was cut off from the world by Western countries. Russia in turn cut off oil, causing oil prices to rise around the world. This impacted oil prices in certain parts of the world that were at odds with Russia,  causing fuel prices to surge and prompting people to drive less to save on fuel. This further increased transportation costs which played a role in increasing tourism prices, leading to less work and economic slowdown. While you could not have played a role in preventing this you could allocate your funds better to safeguard against this slowdown. 

With the Israel-Hamas conflict, Islamic countries are directly hindering any supply of goods/services in the sea by putting pressure on and claiming they will no longer buy from countries associated with Israel. This can be seen with Malaysia banning Israeli-flagged ships in response to the Gaza war on 20th December 2023 and tensions rising with the recent drone attack on 23rd December 2023 (a drone attacked an Israel merchant ship off the coast of India). By directly affecting the general supply of goods, this has caused a slowdown in trade. Ramifications have not yet been seen to an extent like the Russian war.

But if we were to use the domino effect as a basis to analyse these events, we can see that the countries associated with Islamic nations who trade with Israel are being forced to cut ties and have to pick sides. As such, we need to keep an eye on which country supports Israel and those that do not, as this will produce two opposing sides internationally as well as in the conflict, causing trade to be further strained. You can take precautions by seeing where you are and what are the risks and be ready for them.

Securities and Stock Market

Bonds (debt repayment certificate of ownership of a loan that accrues interest till repayment)  backed by mortgages (loans taken out with your house as collateral) are known as mortgage-backed securities (MBS). MBS debuted in 1968, transforming home loans into lucrative investment opportunities. In 2007, mortgage default reached its peak as mortgages and MBS issues were going unchecked and the Lehman Brothers Co. which issued such MBS was the first to face a crash in the stock market with other companies lagging on, marking the onset of the 2008 financial crisis when the real estate market crashed in the USA. The increase in default of MBS caused a global domino effect which caused banks in the USA to go under causing the stock market to plummet, which in turn affected other companies reliant on banks to cut spending leading to less hiring domestically and internationally and a  slowdown all over the world. People started spending less, creating a  reduction in demand and manufacturing as well. If you were to be aware of domino effects you could disinvest timely and allocate your funds better.

Opportunities and Growth

The domino effect does not always produce negative results; it also helps in finding opportunities in the market. The origins of the internet can be traced back to the 1950s when the Cold War was at its peak and it became available to the public in 1991. The World Wide Web, which is a part of the Internet, was released into the public domain on April 30, 1993. With the patent rights released there was a reason to use computers for other than data crunching. If you were to look around, you can observe the world is running on the internet. If you were to use the domino effect early on and take action you could be a billionaire today as the early adopters of this technology gained a competitive edge over others and because of this we have Google, Facebook, Amazon, etc. Even the founders of failed internet companies are rich because they sold their companies at the right time. If you were to look at how our lives have become better because of small changes like electricity, transport, scientific breakthroughs and other cultural introductions – all of which shaped the world in a way we wouldn't have ever expected – you would realise the power of the domino effect.

Being able to recognize the cascading impact of global events is key to the decisions made and how governments leverage these domino effects as well as cause them through their policies that reverberate through trade and industry. The World Trade Organization too estimates significant industry drops due to these disruptions, causing shortages and price fluctuations. This intricate interdependence in the global economy is exemplified by the domino effect, and the best thing to do is to be aware of how you can leverage this for the better.