Markets Historically Ignore Geopolitics, But Fear Economic Risks
- Investors ought not to overreact to near-term geopolitical headlines.
- Equities and gold rose a year after geopolitical events in many cases over the last century.
- Long-term US Treasuries did not perform as well.
Should investors be concerned when geopolitical headlines from overseas resurface?
News headlines about tensions between the US and North Korea might emerge again and give some investors caution after the recent rally in equities and other risk assets. Past sell-offs in risk assets have bid up prices on perceived “safe haven” investments such as gold and US Treasuries.
We believe that investors ought not to panic over such news headlines, so long as economic fallout is limited. If history is a guide, equities and gold potentially might hold their gains, while Treasuries could be at risk of a decline.
Price Performance 12 Months After Geopolitical News |
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| Average Gain | Largest Gain | Largest Loss | Number of Times Up | Number of Times Down | % Times Asset Rises | ||
| Equities (S&P 500) | 5.1% | 32.8% | -36.8% | 14 | 6 | 70% | |
| Gold | 14.0% | 49.3% | -12.7% | 8 | 3 | 73% | (1) |
| Bonds (10-Year US Treasury) | -5.9% | 45.0% | -62.5% | 7 | 13 | 35% | |
(1) Prior to 1972, gold was pegged to a fixed price in US Dollars. Hence, incidents prior to 1972 are excluded from this analysis. The Bretton Woods accord in 1972 ended that arrangement. (https://www.imf.org/external/about/histend.htm )
Source: http://www.multpl.com and Ambassador estimates.
Retrieved on November 15, 2017
We examined 20 major geopolitical events over the last 120 years that could have had significant impact on US financial markets. (The data and findings below are sourced off the table above.)
Examples of major geopolitical events from the 20th century include the onset of World War One in 1914, the attack on Pearl Harbor in 1941, the Cuban Missile Crisis of 1962, and the Arab Oil Embargo in 1973. More recent examples in this current century include 9/11, war in Iraq and Afghanistan, the surprise Brexit vote, and several major terrorist attacks.
Equities
In the 12 months following such events, equity markets as measured by the S&P 500 Index gained roughly +4% (but with a wide disparity of outcomes ranging from +33% to -37%). Equities achieved positive returns in roughly 2 out of 3 instances during these events of the 20th and 21st Centuries.
Gold
Gold, an investment favored by some investors in times of political uncertainty, often rallied a year after the event (average gain of +14% with a range of outcomes from +49% to -13%). Since gold prices were deregulated in 1972, gold rallied over the next 12 months in 10 out of 13 instances (76% of the sample).
Bonds
In contrast, the 10-year US Treasury Bond, also considered a “safe haven” in times of uncertainty, tended to lose money the year after a geopolitical event. These long-term Treasuries lost an average of -6% (with a range of outcomes from +45% to -62%) and posted declines in over half of the instances examined.
The times when equities suffered their worst losses a year later (such as the Arab Oil Embargo in 1973 and 9/11 in 2001) also coincided with the recession. Gold and Treasuries posted gains following 9/11 but suffered losses in 1973 due to higher inflation.
These results might imply that investors ought to focus more on negative ramifications for the US economy as opposed to merely political impact from headline geopolitical events.