How Stocks React to Global Crises
History shows that after an initial dip, share prices tend to bounce back smartly.
Given the onslaught of news about global terrorism, military confrontations and political tensions, it’s not surprising that investors are concerned that a geopolitical crisis could torpedo their portfolios. A recent poll conducted by Gallup and Wells Fargo Investment Institute, the banking giant’s research arm, found that three-fourths of investors are worried that current geopolitical issues will harm their investments—the top worry among those polled. (Worries about domestic politics came in a close second, at 69%.)
Fears about global turmoil may be misplaced. Over the past several decades, geopolitical crises have seldom had a lasting impact on the stock market.
InvesTech Research looked at nearly a dozen geopolitical crises, from the German takeover of France in 1940 to the U.S. invasion of Iraq in 2003, and found that Standard & Poor’s 500-stock index, on average, fell 2.5% in the week following a crisis but was up 7% after six months and 11.5% after one year.
InvesTech president Jim Stack says investors are distracted by global tensions at a time when stocks face bigger risks, such as high share prices in relation to corporate earnings and other measures of value. Other concerns include the possibility of rising inflation and higher interest rates, Stack says.