• Kyle Johnston

Geopolitical Risk, Uncertainty, and Returns

Geopolitical conflicts often cause a stir in the market as worries, fear, and anxiety over what could happen push investors to de-risk their portfolios. Below is a table that has been floating around the internet detailing historical drawdowns around major geopolitical events of the last 80 years. (Please excuse the date errors around the Twin Tower Attacks and the Tet Offensive, I have confirmed the other dates and all associated data.)

What this table doesn’t detail is the forward returns coming out of each conflict. As such, I have added this data below, sorted in chronological order, with average and median returns, both cumulative and annualized.

While almost 30% of the events resulted in negative forward 1-year returns and close to 40% resulted in 1 year forward returns less than 5%, only 16% resulted in negative 3-year returns. Each of the negative 5-year forward returns were due to either the recession of 1974 or the recession of 2008. All in all, these probabilities are not much different from the long-term statistics on stock returns over rolling time periods. In this data set, 70% of forward 1-year periods produced a positive return while historically around 74% of rolling 1-year S&P 500 returns are positive. Looking at 3-year returns, 84% of the 3-year periods in this sample are positive while historically, the positivity rate is also right around 84%.

Economic news, geopolitical events, and natural disasters frequently impact the sentiment of market participants. This is certain. What is not certain, and what is not knowable, is how things will play out from here. Looking at historical data can help you make rational decisions and set your expectations. If your portfolio is well diversified and accurately calibrated to your goals, time horizon, and risk appetite, idiosyncratic events should not make a big impact on your portfolio allocation decisions. More often than not, they can serve as an opportunity to take constructive portfolio management actions such as tax loss harvesting and rebalancing.

Whatever the world may bring us, staying true to a long-term, rational investment philosophy helps to weather the storm that is risk and uncertainty.