What is a Tailwind?
A tailwind in finance refers to a certain situation or condition that may lead to higher profits, revenue, or growth. Tailwind is a nautical term used in the aviation industry. A tailwind is a wind pushing the tail (rear end) of the plane, increasing its speed and helping it go faster.
Headwinds are the opposite of tailwinds. A headwind pushes the head (front end) of the plane, slowing the plane down. In business terms, headwinds refer to situations or conditions that may cause a decline in profits, revenue, or growth.
The above figure represents how tailwind and headwind affect the speed of a plane. The orange arrow shows the direction of the wind. Tailwinds and headwinds result in the same impact on the financial aspects and growth of a business.
- Tailwinds are factors and events that help increase growth or cause positive effects on profits and revenue. Headwinds are factors or events that slow down growth or cause negative effects on profits and revenue.
- A headwind for one sector can be a tailwind for another and vice versa.
- Many factors can present themselves as headwinds or tailwinds, such as regulations, exchange rates, or political and external forces. Hence, it is crucial to analyze such situations to determine if they will act as a tailwind or headwind and plan accordingly.
Factors Causing Tailwinds
The following are the factors or events whose outcome may lead to tailwind or headwind:
The political environment of a certain region can lead to a headwind or tailwind – for example, the declaration of election results. In the U.S. presidential elections, people saw the winning party and its agenda in a positive light for the country’s development and economy. It acted as a tailwind, causing the stock market to rise.
Also, political tensions, international disagreements, and government instability will act as headwinds to a region’s economy and development.
In the era of globalization, where multinational companies are rising, the economic condition of a country or organization has a global effect. For example, the recession in the U.S. led to European and Asian stock markets plummeting. The drop in global oil prices acts as a tailwind for the airline industry, freeing up more money to spend in other areas such as advertising.
3. Stock Market
The world stock markets themselves act as a catalyst to the market’s rise or fall. If investors are optimistic about the current conditions and foresee growth, it would lead to an increase in stock prices. If a sector or industry faces a slump and decline in growth, it will lead to respective stock prices falling.
Unexpected scenarios, such as natural disasters, droughts and floods, and health crises, can cause a negative effect on a region’s development and economic growth. The COVID-19 pandemic acted as a headwind for the world, with millions of lives lost, causing high unemployment rates, businesses shutting down, and stock markets crashing all over the world.
5. Financial Performance
If a company shows growth in sales and profitability or forecasts potential growth in profit and revenue, it will be a tailwind for its valuations. If a country’s GDP rises with a strong projection for the coming years, it will act as a tailwind for the country and attract investment opportunities and trade agreements from other countries.
How It Works
The above figure shows an example of how tailwind works. There is an inverse relationship between jet fuel prices and airline industry stock gains. As oil prices start falling, the airline industry benefits the most, as jet fuel is their biggest expense. Hence, the declining oil prices act as a tailwind. Other industries that tend to gain from the tailwind are:
- Transportation – Companies providing shipping and freight services, such as FedEx and UPS, gain from lower oil prices, as fuel costs are a major expense in their service line.
- Automobiles – Lower oil prices lead to higher car sales, as consumers can afford fuel costs and opt for larger, less fuel-efficient models.
- Retail – Consumers tend to spend more on entertainment, travel, food, and other luxuries now that they are able to save more from lower fuel expenses.
A tailwind for one sector can be a headwind for another. The above figure represents how a fall in oil prices affects the stocks of oil companies. The same scenario of falling crude oil prices would negatively impact oil companies and related sectors.
In such a case, stocks of upstream oil companies underperformed as investors and analysts expected reduced profitability from such companies. Hence, the fall in oil price acts as a headwind leading to retracted growth in value and profits.
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