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Since early 2022, market participants have dealt with more geopolitical issues than they endured over the preceding five years. First, it was Russia’s invasion of Ukraine in February, which stirred high prices in the oil patch.
More recently, as in barely more than a week ago, the terrorist organization Hamas committed atrocities in Israel that fueled comparisons to 9/11 here in the U.S. Israel responded with a massive air campaign against Gaza and is readying a potentially expansive ground invasion. For its part, the U.S. has sent two aircraft carrier strike groups to the region in an effort to ward off other nations in the region from getting involved in the conflict.
Predictably, there’s been some retrenchment in risk assets following the attack on Israel, indicating there’s opportunity for advisors to engage clients regarding the risks and opportunities presented by geopolitical conflict. This is strategy is potentially most pertinent with younger clients because unlike baby boomers and Gen X, millennials and Gen Z haven’t yet been active market participants across a variety of geopolitical turbulence.
Points Emphasis in Geopolitical Conversations
For starters, advisors should avoid the often thorny electoral political elements of geopolitical events. At best, half your clients will agree with your opinion, but that leaves another 50% that could be irked. Just don’t do it.
Second, geopolitical volatility is an opportunity for advisors to clear up some myths for clients, including the perceived vulnerabilities of ex-US investments. In a bygone era of investing, election corruption, protests and armed conflicts occurring outside the U.S. had limited effect on domestic investments, but as recent price action in the S&P 500 suggests, the world is increasingly interconnected. That means there are few shelters from global geopolitical storms.
“Regarding geopolitical conflicts, every situation is unique and often highly opaque,” notes Nationwide’s Mark Hackett. “There are no roadmaps that investors can rely on to judge the potential spillover effects from sudden geopolitical shocks. One thing is certain: as geopolitical tension rises, so does the potential for stock market volatility.”
Understandably, events such as the Hamas attack, spook clients. So much so that they might want to flee to cash or Treasurys, but that also indicates there’s value in advisors getting involved with important history lessons.
“Investors generally understand all investments carry some element of risk, including political, economic, and geopolitical risks,” adds Hackett. “Moreover, just as bursts of volatility can arise at a moment’s notice, geopolitical conflicts usually erupt suddenly, sparking panic among some investors. But using history as a guide, investors can assess the potential impacts on the financial markets to navigate macro uncertainty better.”
No Two Events Are Alike
It’s also important for advisors to impart upon clients that while geopolitical events may have similarities, there are no identical twins. Likewise, there are no identical response to these happenings.
For example, stocks traded higher 12 months after Pearl Harbor and the assassination of President Kennedy. Conversely, equities were lower a year following the collapses of Bear Stearns and Lehman Brothers and following Russia’s 2022 invasion of Ukraine.
“While the past doesn’t always serve as a reliable future template, patterns often arise that allow investors to conclude that stocks eventually recover from major geopolitical shocks,” concludes Hackett. “Investors’ initial reaction to geopolitical events is understandable, as the headlines and initial market volatility usually dominate investor sentiment. Underlying factors, however, like corporate profits and economic growth, ultimately drive the market’s long-term performance. Investors should remember that markets are resilient and have rewarded those long-term investors who stick with a well-crafted financial plan.”