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The Impact of Geopolitical Events  Thumbnail

The Impact of Geopolitical Events


After weeks of escalation, we awoke yesterday morning to learn Russian forces attacked a broad range of targets across Ukraine.  Initial headlines fueled speculation while pushing major indices well below 2% throughout Thursday morning.  Facing an uncertain resolution, we analyzed the impact of prior geopolitical events to better understand their impact on global markets. 

  • Stock market drawdowns from geopolitical shocks average 5%.   These effects seem to last somewhere between one and three months before markets return to pre-event levels.   Larger conflicts in sensitive regions can be deeper and last longer.
  • 5%:  The average return of the S&P 500 six months after an event
  • 9%:  The average return of the S&P 500 one year after an event

The invasion, while deeply unfortunate, allowed us to analyze the impact of geopolitical events across a multitude of market cycles and environments.  We concluded sell-offs are typically short-lived and recover quickly.   Investors in global equity portfolios inevitably face periods of geopolitical tensions.  The market reminded us the last two days of its resiliency, despite elevated uncertainty.  However, we can expect market volatility to persist during the coming days and weeks.  While unavoidable, these events should not deter long-term investment.  

Planning For the Unexpected 

Geopolitical events like military or economic conflicts can affect stock markets in many ways.  We believe current market prices quickly incorporate expectations about the effects of these events on economies and companies. Our investment approach centers on using the information in current market prices rather than trying to outguess them. If markets stay open and continue to function normally, we generally continue investing our portfolios according to our usual process. We believe that the most effective way to mitigate the risk of unexpected events is through broad diversification and a flexible investment process. This philosophy applies to other crises, like natural disasters, social unrest, and pandemics. 

One Final Thought 

The events playing out in Ukraine are a reminder of the prosperity and freedom we enjoy every day in this country, and in many other places around the world.  The intent of this article is to place this event in the context of investing principles.   That said, our primary thoughts and concerns at this moment are with the people being harmed by this conflict.   Their suffering is not lost on us and we, like so many of you, are hopeful for a quick resolution to this crisis.    


Buttonwood Wealth

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