What Geopolitics Really Means for Markets
Updated: Feb 28
Geopolitical risk is a livewire. It's talked about every year by market gurus. The impact on global economies and financial markets is carefully narrated. Meanwhile, market participants watch in awe.
As we witness the latest events unfolding out of Ukraine, and as difficult as it is to separate the humanitarian and emotional aspect of this matter, what I want to do in this note is look at the hard facts of geopolitical risk as they relate to financial markets only.
In today's chart I have plotted each major geopolitical events since 1939 (thanks to DB for the data), from WW-II, the Cuban missile crisis, the Iraq war, to Syria.
It really wasn't until putting this chart together, that I learned that geopolitical events unfold all around the globe far more frequently than I had originally thought. What is obvious to me after seeing the data, less so without, is that the long-term impact on financial markets is almost non-existent as you will see later.
This chart from Deutsche Bank summarises the impact of geopolitical events on financial markets really well.
The key takeaways from the chart above for me are:
The median duration of a sell off during such events is 15 trading days.
The median duration to recover to the level prior to the event is 16 trading days.
The median sell off is -5.7%.
The median return 1 week from the bottom is 3.3%.
The median return 1 month from the bottom is 6.7%.
The median return 3 months from the bottom is 6.5%.
The median return 6 months from the bottom is 7.7%.
The median return 12 months from the bottom is 13%.
Over the short-term markets react to the news.
The market doesn't take too long before it recovers to it's prior levels.
It's corporate earnings and revenue that influence share prices over the long-term.
DB point out that the underlying economic context tends to ultimately dominate. They highlight that:
The oil embargo of 1973, with clearly visible negative economic impacts, saw the biggest selloff in the S&P 500 and the slowest equity market recovery since World War II.
The Vietnam and two Gulf wars by contrast occurred against the backdrop of economic recoveries and saw sharp selloffs followed by long-lived rallies.
The selloffs following President Kennedy’s assassination and President Clinton’s impeachment proceedings occurred during economic expansions and were again very short lived (down -4% but regaining their prior levels in under a week) and saw strong rallies thereafter, while the impeachment proceedings against President Nixon, which occurred in the middle of a recession saw a sharp selloff and rebound but this gave way to a renewed slide after.
The challenge this time around for markets is that they were already trying to deal with inflation and higher interest rates coming off the back of a stellar few years in the market. Although some aspects of the data surprised me, others didn't. The obvious one is the market's ability to be able to evolve, adapt, improve, and grow, even in the face of adversity. The challenge for us as investors is to look beyond the now. By the time you and I can react or respond to the news, the market has probably already priced in the information. It does it pretty quickly and does it pretty well.
There is always a reason to sell stocks, geopolitics or otherwise. And if you sold stocks each time you found one, you wouldn't ever be holding any. Risk and uncertainty is the price we pay to enjoy the long game.
My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast. I've shared the exact chapter where we discuss this below.
You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.