Like a rock dropped in a still lake, geopolitical risks only make temporary ripples in the market.
Some argue that the world has never been so uncertain. The Brexit fiasco in the U.K., the government shutdown over a border wall in the U.S., and the trade war with China are recent examples of geopolitical risks that have been important sources of anxiety among investors.
If political uncertainty is potentially much higher than in previous decades, investors are raising an important question: should they worry?
The answer might be quite complex because the diverse nature of geopolitical risks imply that different events around the globe will never lead to the same results. But when looking at the historical data, it is clear that major geopolitical events for the most part have only had short lasting effects on markets. Often, these market effects can be attributed not only to the events themselves, but investors’ interpretation and reaction to them.
The experts from Trust Point’s wealth management team like to think of markets as a still lake and geopolitical events as a rock. When a rock is dropped into a still lake, it sends ripples throughout the surface. After a short period of time, however, the lake returns to its natural state.
It is the same with markets. Once a major geopolitical event happens, the ripples can be seen for a short period of time, often leading to quick decreases in asset prices. However, after some time has passed, the markets calm down and refocus on the true fundamentals that drive them.
Geopolitical risks can move markets in the short term, but their importance to markets over the long run is generally greatly overstated.
The table above illustrates that point. Although the markets experience downturns in times of war, terrorist attacks, and other major geopolitical events, these effects are nothing but ripples in the water and should not be of worry for long-term investors.
Next time we get hit by a big geopolitical event, think about the rock and the lake and don’t let your emotions (or the media) influence your thinking. It is time in the market that matters, not timing the market. The lake eventually returns to its natural state. It always does!