Geopolitical Risks and the Stock Market
Geopolitical risks have been increasing in recent years. From China-Taiwan relations, skirmishes in the South China Sea, to the Russia-Ukraine War, geopolitical risks were already rising. Now, investors are faced with a new risk with the Israel-Hamas War. While our job is to focus on the economic and investment implications of these events, we cannot disregard the human tragedy involved. Although unlikely, we hope for a quick and peaceful resolution. Looking at the investment implications is tricky and hard to quantify as we have spoken about in the past. Each event is different as far as scope and magnitude. In addition, each event happens under different market and economic conditions. If we look at past market reactions to war and crisis events, you can see that returns on the S&P 500 differed by event but were largely unaffected. We do point out that the 9/11 attack coincided with the dot-com bubble, so attributing the 1-year return solely to what happened on 9/11 might be misleading.
Source: Cetera Investment Management, FactSet, Standard & Poor’s. Returns shown are total returns, which include dividends.
The Israel-Hamas War is a very fresh and fluid situation. There is much we don’t know and there are many ways the war could evolve. Perhaps the worst fears would be that more countries get involved, but it appears that the U.S. and other countries are trying to de-escalate the tensions from spreading. If oil-producing countries become involved, this would likely drive the price of oil higher. This could in turn drive inflation higher and potentially lead to more interest rate hikes by the Federal Reserve. However, the geopolitical events could also cause the Fed to pause interest rate hikes in the near-term as uncertainty has grown. The war also creates more urgency to elect a Speaker of the House, which may decrease the odds of a future government shutdown after the stopgap spending bill ends November 17. Finally, if the war escalates, that could lead to a flight to quality as investors could flock to bonds and drive down bond yields, thus pushing bond prices higher.
We don’t want to speculate too much on what may happen. It is extremely difficult and extrapolating the market impact can be even more difficult. Market volatility was already on the rise due primarily to rising bond yields. The increased geopolitical risks add to uncertainty and could drive more volatility.
Bottom Line: Previous stock market reactions to war and crisis events have been muted. During times like these we always encourage you to stay focused on your destination and not the path. Your destination is your plan and your goals. Focus on the destination and not the path because the path is impossibly hard to predict during global conflict.
As always, if you would like to discuss your portfolio or financial plan, please don’t hesitate to reach out. Thank you for the continued opportunity to serve you.