Headwinds and Tailwinds are originally from the aviation industry, which used the old nautical term to describe the effect that winds can have on flying speed. Planes flying east over the Atlantic ocean, for example, would take a different time than the return flight, depending on the wind pushing the planes flying one way but not the other.
However, headwinds and tailwinds also have come to be used as economic or business terms, especially when investing in stocks and shares.
How do stock markets work?
In order to understand headwinds and tailwinds, it’s useful to have a deeper understanding of how stock prices are set, how they depend on the US economy, and how investors make a profit from their investment.
Stock prices are set by the amount of demand for a stock – if more people wish to buy a stock or share than wish to sell it, this will increase growth and cause stock prices to rise, but if more people wish to sell a stock than wish to buy it, the price will drop. People are likely to invest in an industry or company that is expected to do well, and so increase their revenue.
Due to this, prices are intrinsically linked to how a company or an industry is perceived to be doing. For example, oil companies may enjoy high stock prices if a new source of oil is discovered, but if lower oil prices were necessary, or if natural disasters impacted the supply of oil, then the market may be seen as unstable, making it less attractive to investors and so making prices decline.
This does not just affect the stock price, but also interest rates, exchange rates, commodity prices, and so any funds invested in them.
What’s a Headwind vs Tailwind?
As with flying, where winds such as jet streams (narrow bands of fast-moving air) can affect how fast a plane can fly, in the financial market, headwinds and tailwinds also refer to factors that can influence the growth of a company, an industry or even the market as a whole.
Headwind
In aviation, headwinds refer to air moving in the opposite direction to the plane, the wind pushing against the plane and making it slow down. In finance, therefore, it means any factors that will slow down the growth of an investment or a business.
Headwind example
A good example of a headwind is the incident with the Evergreen boat on the Suez canal. This caused shocks to global markets and dramatically slowed growth in the affected sectors.
Tailwind
A tailwind is the opposite of a headwind. In aviation, this is where air flowing in the same direction as the airplane help it move faster. In finance, this means factors that will make annual growth higher in terms of an investment.
Tailwind example
Say, for example, there is a set of circumstances that boosts consumer spending, such as low rates of savings or a large event such as the Olympics, businesses that sell directly to consumers, such as coca-cola, would experience a boost in their growth. This would be a tailwind.
How can financial Headwinds and tailwinds affect my investment?
Investing can be nerve-racking. You put money into the stock market and everything feels up in the air until you cash out. Having factors that are outside of your control affect your money as well adds another stressor, especially when these factors can affect the entire country or even the world.
However, while headwinds will slow the speed of growth in your investment and tailwinds will increase the speed of growth, under either condition you can see a return on your investment. If you have a financial advisor, they will be able to give you more detailed information on the market at that point.
What can cause a financial headwind vs tailwind?
In theory, a headwind or tailwind is any factor that affects the value of an investment or investment portfolio, and so almost anything could become a headwind or a tailwind. That said, some factors are more common than others and are listed below.
- External Factors
External factors are the least predictable factors that can cause headwinds or tailwinds. These can rock global markets, send commodity prices soaring, or crash markets entirely. Mostly, these are natural disasters such as hurricanes or tsunamis.
- Political Factors
Political Factors can always make investing in a business or sector look more or less appealing. This can be anything from a new bill being passed by the government that prohibits or encourages action in certain sectors, or a threat of war in a certain region making the costs of producing a certain good skyrocket. For example, if a business manufactured airplanes in a region that was de-stabilised, then the business would have difficulty securing its supply and so would become less attractive to investors, with this then becoming a headwind for the business.
- Economic factors
If an economy is doing well and experiencing growth, this will lead the way for an individual business or for an investment fund to takeoff and also experience growth. If the economy is in recession, however, investments will often experience headwinds. In general, investments will experience growth, or loss, in the same direction as the economy.
- Financial performance of a business
If a business is doing well financially, this normally has a positive effect on the growth of investments in the business, meaning that this would cause a tailwind for the investment.
Can something be both a headwind and a tailwind?
It is possible that an event could be a headwind for one sector and a tailwind for another, in fact, this is quite common. People invest in commodities when the market seems unstable, for example, so what might be a headwind for shares could be a tailwind for commodities.
To give a more specific example, if a new US president was elected with a strong pro-renewable agenda, this could mean a lot of uncertainty for the oil and fuel industries and oil companies would see this as a headwind, slowing their growth and threatening their profits.
However, companies in the renewable sector or who invest in green technologies such as electric vehicles would see this as a tailwind. They are sure to get an influx of new government funding which will help their growth, increase their profits and progress their technology.
This would have a knock-on effect, where people were less likely to invest in oil companies or companies with a large carbon footprint such as the flying sector, but more likely to invest in green technology businesses. This would mean that this headwind-tailwind combination would continue for several years, most likely until a new president took office.
Due to the interconnected nature of the global economy, it is highly likely that this tailwind would have an effect around the world. Increased investment in one country in green technology would improve the revenue in other countries as the technology became cheaper and more reliable, making the countries more attractive to funds looking for profits for their investors.
Can Headwinds or Tailwinds be predicted?
To some extent, financial professionals with many years of experience can predict what can cause a headwind or tailwind. However, it is always worth bearing in mind that the stock market is largely based on confidence, and unforeseen circumstances can outweigh any effect from the predicted headwind or tailwind.
While there are some professionals who make a living by predicting the growth rate of investments, you should always take their advice with a pinch of salt, especially if you are planning to put your finances on the line. There is also a big difference between investment predictions from different sources – some popular sources, such as TV investment advisors could well be sensationalized for the media in order to push views or sell their books or other merchandise. However, advice from a financial advisor with a lot of experience will often hold a lot more truth. Basically, you should look at how the financial advisor makes their own financial gain. If their income relies on giving good advice to keep their customers around, they have a vested interest in predicting head winds and tail winds accurately.
Of course, it bears repeating that all investments have risks. There is no guaranteed way to make a big gain on the stock market, and you could lose a substantial amount of your funds.
Are cryptocurrencies affected by headwinds or tailwinds?
While cryptocurrencies can be affected by external factors such as cause headwinds or tailwinds, these markets are especially unreliable and volatile. Due to the de-centralized nature of cryptocurrency there are no checks and balances on the system and the price can change with great speed. This makes it very difficult to get answers about what, precisely, is affecting the growth or lack thereof.
Several things could be assumed to affect the growth of cryptocurrencies, such as:
- The cost of producing cryptocurrencies
Cryptocurrencies are expensive to produce and those that help with this are not always guaranteed to receive anything for their efforts. If it requires more resources to produce a cryptocurrency, then this could change the desirability of the cryptocurrency.
- A move to regulate the cryptocurrency market
If a government were to instigate laws regulating or restricting the trade of cryptocurrencies, this could become a large headwind for cryptocurrencies. Of course, due to the online and decentralized nature, this is very hard to do, and would probably take a large amount of international cooperation. Any pilot program of this type would be able to be easily predicted.
- A large investment company announcing an intention to begin trading in cryptocurrencies
This could be seen to lend legitimacy to cryptocurrency markets and act as a tailwind on the market.
- Economic climate
The economic climate has a tendency to affect investment overall and therefore will affect Cryptocurrency prices. During times when the market is unstable, people are more likely to choose more secure options such as savings over high-risk investments. Equally, if inflation is higher than the interest rates on savings accounts, people tend to be more open to other forms of investment as they lose value on savings and don’t see a point in saving. These conditions would wind up affecting the cryptocurrency market as it affects the attractiveness of investment and therefore the attractiveness of investing in cryptocurrency.
Unfortunately, due to the volatility of these markets, it is impossible to say with any certainty if these factors would cause headwinds, tailwinds, or have no effect at all.
Are there investment options that are not affected by headwinds or tailwinds?
If you choose an exceptionally low-risk investment such as a fixed-return government bond, it may be possible to find an investment that is not affected by external factors. However, this is highly unlikely.
Most investments are linked to the stock market, economy, or to the profitability of a specific business. This means that every investment that is not fixed return is affected by headwinds, slowing growth, or tailwinds, increasing it.
Investment almost always has an element of risk, and this should be remembered before you consider investing.
What about ETFs?
ETFs are Exchange Traded Funds. These are a type of stock option that tracks a group of individual stocks or the overall state of the stock market. This means that they will show the overall growth or loss of a wider range of stocks, averaging them out. The result of this is that a single stock cannot cause massive losses – as long as the average is good, the ETF grows. This often means that the speed of the increase is a lot slower than a rapidly-improving singular stock, but it also makes ETFs a lot less susceptible to headwinds compared to single stocks. This can make ETFs a safer investment even though the speed of growth is lower. Of course, even this type of investment is not fully safe and can go down. While the drop is often not as high-speed as a single company’s stock crash, major economic events can still cause loss with a dizzying speed – much like the unexpected and rapid economic drop at the start of the 2020 pandemic.
Someone told me that there is a tailwind coming to a certain market. Should I invest?
If someone cold-calls you, or approaches you with no prompting about a deal that sounds too good to be true, it will absolutely always be a scam. They will not have a lead on a great deal or the answers on how to predict the stock market with one hundred percent accuracy. They will take any funds that you give them and takeoff.
If this is not a scam, this could still be highly illegal if the ‘answer’ they claim to have relies on insider trading. Insider trading is where stocks in publicly traded companies are traded based on non-public or privileged information. Giving, or acting on, tips or leads about this information is normally illegal and any profit made from this could be confiscated or even wind up landing you in prison.
What if I don’t want to invest?
If you are unsure about investing there are many other ways to improve your financial state, such as saving or using the funds you would have invested to start your own business. The right answer for you depends entirely on your life and where you want it to lead.
Are savings affected by headwinds or tailwinds?
There is not exactly a simple answer, but the general fact is that, no, savings accounts are not usually affected by these issues. This is because the interest percentage is not governed by external factors. Instead, you will often find that the bank or saving institution sets an interest percentage for your account. This interest percentage is then usually fixed for a set number of years.
After this period, you might find your interest percentage changing – this is because banks often tailor their interest amounts to the overall economic climate. When the economy is strong, you will find interest percentages rising, while a poor economy will make it so that interest percentages sink. These economical conditions will often be the same external factors that cause the head wind and tail wind examples that you have read about in this article. However, you will see a much more gradual change with savings accounts, and the overall impact will be less than with the investments mentioned above.
All of this means that savings accounts are typically much safer, as you will not find that a headwind will negatively impact your savings by the same amount as it would for an investment.
Conclusion
The terms tailwinds and headwinds are taken from flying planes, where pilots make better speed if they are flying with the wind, than if they are flying against it, and they have similar meanings in the financial sector.
Simply put, tailwinds propel your investment forward, improving growth with impressive speed, while headwinds make the speed of growth of an investment slower.
Predicting these changes is difficult, and these are yet another factors to consider when looking at investments.
