Investing Through Significant Geopolitical Events, Conflicts, & War

April 22, 2024

Talking about investing in times of war and geopolitical conflicts can appear callous.

But it’s our job.

We provide guidance during crises, whether narrow tragedies affecting our clients or broad global concerns.

Here is stock market data you need to know about the long-term, the short-term, and volatility around conflicts.

Long-Term Performance

Large US stocks have gone up over the long term despite significant challenges. As the Bank of America log chart illustrates1, significant negative events like world wars, terrorism, economic recessions, pandemics, and more have occurred since 1824.  However, investing in the largest US companies has historically paid off over the long term. 

Shorter-Term Performance 

In the shorter term, barring major economic issues (e.g., inflation, bad corporate earnings), stock market drawdowns are typically not too severe and recover relatively quickly. LPL research shows that since the Pearl Harbor attack to the 2020 Iranian General assassination, the average S&P 500 decline was -5%, recovering within 47 days on average.2While averages have limitations, it provides a reference point. Savita Suibramanian, of BofA Global Research, agrees: “More generally, history tells us that geopolitical shocks that don’t fundamentally impact the economy have tended to result in a 5% to 10% pullback in the S&P 500. Fortunately, our research shows markets have typically more than recovered from such losses within three months.”3 After the recent escalation of tensions between Israel and Iran, Madison Faller, a Global Investment Strategist for JP Morgan Asset Management, concluded that normally geopolitical unrest without significant economic disruption “has tended to be short-lived”.4  Though the title is a bit exaggerated, Michael Batnick released this chart from the wealth management firm that he is a managing partner of, which shows the investment return in the S&P 500 1 year after major geopolitical events since 1940.5

Volatility

Surprisingly, the stock market can be less volatile during conflict. A study by a Certified Financial Analyst found that stock market volatility was lower during wars from 1926 to mid-2013, except during the Gulf War.6 A working paper from the National Bureau of Economic Research supports this also by claiming: “Wars and other periods of conflict typically heighten political uncertainty, but US stock volatility is 33 percent lower than usual in such times.”7

The default setting of life and investing—whether in times of war or in times of peace—is uncertainty. Constantly making chaotic changes to your portfolio due to sad and scary external events may hinder your ability to reach your goals. As the SEC states, “…rebalancing tends to work best when done on a relatively infrequent basis.”8 Sticking to time-tested investment principles and having a long-term plan and investment portfolio you can stick with—during times of conflict—is crucial. 

--

Sources:

  1. Chart taken from Ben Carlson’s November 17, 2023 blog post “4 Charts That Explain the Stock Market”. Accessed online: 4 Charts That Explain the Stock Market
  2. Data taken from Investopedia’s October 11, 2023 article “How War Affects the Stock Market”. Accessed online: How War Affects the Modern Stock Market
  3. “What rising geopolitical tensions could mean for the markets and economy”, October 24, 2023. Accessed online: https://www.privatebank.bankofamerica.com/articles/what-rising-geopolitical-tensions-could-mean-for-the-markets-and-economy.html
  1. “Quick Shot: Geopolitical unrest: Assessing market implications”, April 16, 2024. Accessed online: Geopolitical Unrest: Assessing Market Implications
  2. “The Thing that Doesn’t Mix Well With Investing”, April 16, 2024. Accessed online: https://theirrelevantinvestor.com/2024/04/16/the-thing-that-doesnt-mix-well-with-investing/
  3. Mark Armbruster, “What Happens to the Market if America Goes to War”, August 29, 2017. Accessed online: https://blogs.cfainstitute.org/investor/2017/08/29/u-s-capital-market-returns-during-periods-of-war/
  4. “Why Stock Markets Are Less Volatile When the US Is at War”, May 2nd, 2022. Accessed online: Why Stock Markets Are Less Volatile When the US Is at War
  5. “Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions”. Accessed online: Ten Things to Consider Before You Make Investing Decisions