When the world seems chaotic, it is natural to worry about your investments. Wars, political upheaval, and global events can deliver major volatility shocks to investment markets. During these troubled periods, some investors might think “Should I change course?” But history has shown that staying invested and on track with your investment plan during these volatile times is very likely the best choice. In a world that often feels uncertain, staying calm and navigating through the storm is often the most certain path to success.
Seeing through the storm: Event-specific view
It has long been said that investment markets abhor uncertainty. As much of the value of financial assets is predicated on future expectations of the performance of a company and the economy in which it operates, geopolitical events create uncertainty that undermines confidence in the outlook for the future.
When major global events happen, stock and bond markets often react quickly, immediately assuming the worst. Once the worst fails to materialize, markets typically rebound and carry on along the path they had previously been on. Here are three historical examples to illustrate the point:
- After the September 11 attacks in 2001, the S&P 500 fell by 11.6%. But within a month, it had recovered all its losses.1
- During the 1962 Cuban Missile Crisis, the S&P 500 dropped 6.3% over eight days. Just 5 months later, the market was up 36.7%.2
- When Russia invaded Ukraine in February 2022, the S&P 500 initially fell 2.6%. By mid-March, it had already regained those losses.3
These examples serve to demonstrate that, despite the initial pullbacks, markets have historically bounced back within a relatively brief period of time, regaining their losses and in fact moving higher.
Seeing through the storm: Big picture view
Looking at the longer-term picture, we see further evidence that markets tend to advance over time, despite the many serious issues the world periodically faces:
- From 1927 to 2013, geopolitical events only caused about 1% of the S&P 500's big price changes.4
- Since World War II, the S&P 500 has gone up by about 11% per year on average, despite many global crises.5
- The Canadian S&P/TSX Composite has shown similar resilience. For example, it dropped 12% after the start of the Iraq War in 2003 but recovered within three months.6
Canaries in the coal mine
Beyond broader markets, it is interesting to note that short-term volatility generated by geopolitical and other major global events can impact some areas of the market more than others. These “canaries in the coal mine” are often the first indicators that volatility is hitting markets—with some providing “safe harbour” through the storm, while others bear the brunt of the volatility:
- Commodities: The prices of commodities, especially oil, are highly sensitive to geopolitical events. For instance, conflicts in oil-producing regions can lead to supply disruptions, causing oil prices to spike.7
- Gold: Gold is often seen as a safe haven asset during times of uncertainty,8 and consequently often sees a surge in demand during times of trouble.
- Currencies: Geopolitical instability often shows up in the value of currencies. Those that are seen as safe havens tend to soar as investors seek “safe harbour” in times of trouble. The most popular of these are the U.S. dollar and the Swiss franc.9 Conversely, the currencies of countries directly involved in conflicts may fall.
In the moment, the many geopolitical events we face over a lifetime of investing can seem worrisome and perplexing for investors. But, it helps to keep in mind that companies are resilient and adaptable, and are generally able to find ways to overcome short-term challenges and continue to grow. As well, governments and central banks often step in to assist and support the economy during crises. And once they have had a chance to absorb and assess geopolitical and major events, investors are able to re-focus on the future, allowing cooler heads to prevail and markets to get back to being driven by company and economic fundamentals.
Staying on course to your plan
It can be hard to remain calm when it seems like so many of those around you have their hand hovering the panic button. But keep in mind what your long-term investment goals are, and how short-term volatility driven by world events have historically had little to no effect on long-term returns. This can help you avoid making quick decisions based on short-term events that could actually hurt your long-term investment returns. A well-diversified portfolio that supports your personalized investment plan can help you through geopolitical storms and on track to achieving what matters to you.
Sources:
- 1Ned Davis Research, 2001.
- 2LPL Research, S&P 500 Index, 2022.
- 3S&P Dow Jones Indices, 2022.
- 4Vanguard, "Global macro matters: Geopolitical turmoil affects markets, but long-term impact is limited," 2014.
- 5J.P. Morgan Asset Management, "Guide to the Markets," 2023.
- 6TMX Group, Historical Data, 2023.
- 7Morgan Stanley, “What Global Turmoil Could Mean for Investors” (2024).
- 8J.P. Morgan, “How do geopolitical shocks impact markets?” (2024).
- 9CFA Institute, Geo-Economics: "The Interplay between Geopolitics, Economics, and Investments - Chapter 1: How Geopolitics Can Influence Markets" (2022).
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.