Market Perspectives – Geopolitical Tensions

January 2022 turned out to be a very volatile month and one of the worst Januarys we’ve seen in a long time. The volatility was brought on by several factors, but one that we wish to highlight is rising geopolitical tensions. Russia’s military presence around the Ukraine appears to be escalating and conflict between China and Taiwan has not eased either. As investors, what should we make of these geopolitical tensions?

One thing we do know is that geopolitical tensions and risks are constantly with us. Think back to the last several years and we’ve been faced with cyber wars, tensions in the Middle East, North Korean missile tests, terrorist attacks, and many others. If we let every conflict or threat of conflict affect the way we invested, it would be tough to ever be invested in equities as there always seems to be a risk.

While it’s tough to know exactly how the market would react if one of these risks came to be, we can look at history to see how the market has done during past geopolitical events. The chart below looks at every geopolitical event going back to World War II. While the severity of market drawdowns varies in depth and duration, we can take solace in the fact that, for the most part, markets usually take them in stride. On average, the total drawdown from a geopolitical event occurring is 4.6% and lasts an average of 19.7 days.

This is not meant to make light of the impact these events may have on the people affected. However, as investors, we must weigh the economic and financial impact of each event as they occur and respond accordingly. While every event in the future will be different from the past, it is helpful to understand just how markets have behaved. With a strong economy, growing corporate earnings, and strong consumer balance sheets we believe that the market will be able to handle a shock in stride. That said, as always, when the facts change so will our perspectives.