Strong Tower

Geopolitical Instability; What Does It Mean For Markets?

Geopolitical Instability

Investors can be nervous people. That goes double for institutional investors; the people who manage big pension funds, mutual funds, foundations or the funds in insurance companies. When you are responsible for managing billions of dollars, in some cases, you worry about a hiccup of any geopolitical nature. It can mean volatility in the market and that can mean a loss.

Unfortunately for those money managers, there is always some concerns on the world stage. Whether those concerns have to do with Iran, North Korea, Russia, terrorism, the French election or Syria, it can impact the oil markets or the stock market. Uncertainty about anything is not welcome in the equity or futures markets and it can wreck havoc with many forms of investments.

In times of uncertainty, many investors seek out safe havens such as gold or government bonds, as lower risk alternatives. Yet, employing a knee-jerk reaction isn’t always the best response. Since many geopolitical events are short-lived and selling out of equities may mean real losses, according to some experts.

Still, big changes in the UK and the potential for change in France, alongside a threatening North Korea and an Iran with nuclear ambitions has proven unsettling for those investors who prefer calm waters and stability as the preferred investment environment.

Not Troubling the Market Much

Macroeconomic policies in many countries, including the U.S., have helped to weather many of the concerns about geopolitical risk and have softened the impact on the markets. This even includes the expectation of another Fed interest rate increase in June. The big gains, directly after the presidential election, have been mostly maintained despite several geopolitical concerns.

According to an article appearing in the Council on Foreign Relations Macro and Markets, research by S&P Capital IQ, looked at the markets starting at the beginning of World War II. They looked at geopolitical events they termed “market shocks,” and their impact on the S&P 500. According to the study, each geopolitical event resulted in a median loss of 3.4 percent until the bottom was hit. After this, it took only five days on average for the market to recover to the level before the event.

Short Lived Response

The article goes on to point out that there are a lot of investors who have a strategy of buying-the-dip; buying when there is a price drop, and this can make the impact of a geopolitical even short-lived. Some example the Crimea conflict, which caused less than a point drop in the market and then five days to recover or even 9/11, which resulted in an 11.6 percent drop in the market, which took 30 days to recover. The Lehman bankruptcy or Black Monday in 1987, had more profound implications for the market at the time. It would appear that these other market events took a greater toll on investors.