Capital Market Impact

How to help investors when geopolitical risks arise

October 17, 2023
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Regarding geopolitical conflicts, every situation is unique and often highly opaque. There are no roadmaps that investors can rely on to judge the potential spillover effects from sudden geopolitical shocks. One thing is certain: as geopolitical tension rises, so does the potential for stock market volatility.

Investors generally understand all investments carry some element of risk, including political, economic, and geopolitical risks. Moreover, just as bursts of volatility can arise at a moment’s notice, geopolitical conflicts usually erupt suddenly, sparking panic among some investors. But using history as a guide, investors can assess the potential impacts on the financial markets to navigate macro uncertainty better.

S&P 500® Index performance during significant historical events.

The accompanying table lists a series of significant historical events along with the performance of the S&P 500® Index over different periods following each event. There are several interesting observations. For one, each geopolitical event varies in scope and duration. Second, and arguably a critical nuance for investors to consider, stock market volatility during these events can also include market drawdowns and recessionary conditions, sometimes occurring independently of the geopolitical event and highlighting the interplay of different risk factors. For example, the USS Cole Yemen Bombing and the September 11 terrorist attacks in 2001 overlapped with the dot-com stock crash between March 2000 and October 2002.

While the past doesn’t always serve as a reliable future template, patterns often arise that allow investors to conclude that stocks eventually recover from major geopolitical shocks. Investors’ initial reaction to geopolitical events is understandable, as the headlines and initial market volatility usually dominate investor sentiment. Underlying factors, however, like corporate profits and economic growth, ultimately drive the market’s long-term performance. Investors should remember that markets are resilient and have rewarded those long-term investors who stick with a well-crafted financial plan.


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