Geopolitics Don’t Matter To Stocks, Period.

Geopolitics Don’t Matter To Stocks, Period.
Paul Allison, CFA

3 months ago2 mins

The world is unpredictable. And a lot of different things can affect markets. So you might be forgiven for thinking that to be a good investor, you have to stay glued to the news and adjust your portfolio according to the latest events (preferably a bit faster than everyone else). But, you don’t.

Yes, global events like the ones in this chart are important. And it’s essential that you keep up with what’s going on in the world if you’re investing in stocks. But for me, that’s where it stops: I don’t take any drastic action based on them. And I don’t think you have to either. Take a closer look at the table, which comes from data analytics firm Morningstar: it lists 20 major global events – some geopolitical, others finance-related – over the past 80 years and the performance of big US companies, over the following month, six months, and year. On average, the market was only modestly lower (3%) a month after these events, but was higher both six months and a year later. What’s more, it was higher 55% of the time after just one month, 60% after six months, and 60% after a year. Those are good odds.

Something else stands out in the table too: big market drops have happened immediately after massive financial events, not geopolitical ones. If you were to strip out the collapse of Lehman Brothers in 2008 and the stock market crash of 1987, the average performance across those time periods would look even better.

The point is, there’s just no evidence that geopolitical events have any meaningful impact on medium or long-term stock prices. In fact, if you extend the time periods in the table further, geopolitics barely register (from a stock market perspective anyway). It’s a pattern that repeats often enough that it’s predictable, even when little else is: geopolitical events surface, and the stock market carries on, regardless.



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