However, the theme that keeps coming up is that throughout these events the stock market has consistently risen, despite geopolitical events. The 40% drawdown in the S&P 500 at the start of the second world war was, for anyone with a time horizon long enough to foresee the allies' ultimate victory, a massive buying opportunity.

Geopolitical risk tends show up short-term thinking - oil prices, FX spot markets, while equity markets tend to be a bit more insulated. But geopolitics as a term masks a more important underlying consideration, everything is local. So events in the Middle East will have an outsized effect on markets in the region over say, the US or Asia. So the nature of the geopolitics is important - for instance in the event of a Chinese invasion of Taiwan, the impact on Taiwan semiconductor stocks would be way more lasting than the impact on Apple, even if both were caught up a broad selloff initially. Apple could realign its manufacturing processes, TSMC might no longer exist.

Let’s dive into the facts

The Short-Term: Volatility Spikes and Market Dislocations

Geopolitical shocks typically trigger knee-jerk reactions—spikes in volatility, flight to safety, and sector rotations. Key examples:

• Russia-Ukraine (Feb 2022): The MSCI Europe index fell ~9% in two weeks post-invasion. Brent crude surged over $130/barrel.
  
  
• Israel-Hamas conflict (Oct 2023): Brief spike in oil and gold, but equities largely shrugged it off within a week.
  
  
• US-Iran tensions (Jan 2020): Gold jumped 2.5% in three days; S&P 500 dipped 0.6% before rebounding.
  
  

Since 1980, the S&P 500 has fallen on average 5–10% during major geopolitical crises, but recovered within 3–6 months in most cases (source: Deutsche Bank).

Short-term, markets price in uncertainty more than the actual outcomes. Investors often overreact at first and normalize after clarity emerges.

JPMorgan did some research on wars and geopolitical flashpoints between 1940 and 2022. “We conclude that in the three months after an event the market underperforms, on average, but—this is key—six-month and 12-month subsequent returns are identical. When you consider the average equity investor experience, it’s as though the event never happened,” they say.

Long-Term Impact: Structural, Sectoral, and Strategic

Over the long haul, the market impact of geopolitics is more indirect—but still significant:

Structural Risk Premiums

Geopolitical fragmentation raises the cost of capital, discouraging cross-border capital flows.

• China-US decoupling has pushed companies to "friendshore" or diversify supply chains—adding cost.
  
  
• Military spending cycles are rising: global defense budgets hit $2.4 trillion in 2024, up 18% since 2020 (SIPRI).
  
  

Energy and Commodities

War and geopolitical realignment often result in supply shocks:

• The Ukraine war cut Russian gas to Europe, shifting long-term energy policy toward LNG and renewables.
  
  
• Middle East risk premium supports gold and oil. Gold ETFs saw net inflows of $6.1bn in Q1 2024 during rising Israel-Iran tensions (World Gold Council).
  
  

Equity Performance Divergences

Markets tend to favour domestic-facing sectors or regions seen as more insulated.

During the 2014 Crimea annexation, Russian equities collapsed (~50% drawdown), while US defence stocks (e.g., Lockheed Martin) rallied over 20% in the following six months. The S&P Aerospace & Defense Index is up 77% since the 2020 low, outperforming the S&P 500 (+61%) over the same period, buoyed by elevated global tensions.

Interestingly, the 1973 oil shock did have a lasting impact on equity returns, mainly because oil remained in short supply for an extended period, resulting in a macro state of “stagflation”, according to JPMorgan.

“In other words, high oil prices essentially stopped the economy from operating efficiently in the 1970s. In contrast, after Russia’s invasion of Ukraine shocked global energy markets in 2022, additional oil supply rapidly came on stream. As a result, the economic and market impact of the recent shock was less severe and sustained than its 1970s counterpart,” they write.

The major structural difference between the two episodes relates to U.S. oil production. In the 1970s, the United States relied heavily on oil produced in the Middle East. Shale has transformed this situation and the US is now exporting crude. It’s a different economic dynamic and highlights that while geopolitics can impact markets longer term, the structural dynamics of the global economy are what’s impacted and what is important for the investor beyond the headline risks.

Investor Takeaways

• Short-term: Expect volatility, not necessarily bear markets. Focus on liquidity and avoid panic selling.
  
  
• Long-term: Geopolitics reshapes investment themes, like energy security, defence, and supply chain diversification.
  
  
• Portfolio Positioning:
  
  
  • Defence and cybersecurity exposure.
    
    
  • Consider energy and gold as hedges during flashpoints. JPMorgan says gold has typically been the best tactical hedge around events.
    
    
  • Geopolitical instability tends to benefit US assets due to haven flows and dollar strength—though that can fade over time and recent economic policy uncertainty over trade and tariffs has recast assumptions about the US.
    
    

Bottom Line

Geopolitics does matter—but the how and when is crucial. Markets are remarkably adaptive to crises, often quicker than headlines suggest. However, investors ignoring long-term geopolitical shifts risk being on the wrong side of a structural regime change.

Don’t trade the shock—position for the shift.

Finally - Investors may worry about events in the Middle East - perhaps rightly - but economic uncertainty has many parents, and policy uncertainty is arguably more important right now.