Geopolitical events and military conflicts often create uncertainty in financial markets, leading many investors to question how they should respond. While every situation is different, history over the past century provides useful perspective: markets tend to react quickly to uncertainty, but they also tend to recover faster than most expect.
Short-Term Volatility Is Common
When conflict begins, markets typically experience an initial decline as investors process new risks. Historically, these drawdowns have often been in the mid-single to low double digits, with markets reaching a bottom within weeks to a few months.
This initial reaction is largely driven by uncertainty not necessarily by lasting economic damage.
Recovery Often Happens Sooner Than Expected
One of the more consistent historical patterns is that markets frequently recover before geopolitical situations are fully resolved. Because markets are forward-looking, they begin to stabilize and rebound as soon as expectations improve, even if headlines remain negative.
In many past conflicts, markets have returned to pre-event levels within months and have often been positive one year later.
Economic Impact Matters More Than the Conflict Itself
While geopolitical events can trigger volatility, the broader economic environment has historically been the key driver of longer-term market outcomes.
More significant and prolonged market downturns have typically occurred when conflicts lead to:
- Rising inflation
- Energy supply disruptions
- Higher interest rates
- Slowing economic growth or recession
The 1970s serve as a clear example, where conflict-related oil shocks contributed to inflation and a longer recovery period for markets.
Keeping Volatility in Perspective
It is important to distinguish between short-term, event-driven market pullbacks and broader bear markets.
Geopolitical-related declines have generally been:
- Shorter in duration
- Less severe
In contrast, deeper and longer-lasting bear markets have historically been associated with economic or financial system stress, rather than geopolitical events alone.
The Long-Term Investing Approach
For long-term investors, periods of uncertainty can be uncomfortable but they have also historically been part of the investing cycle.
Maintaining a disciplined approach during these periods may allow investors to:
- Participate in eventual market recoveries
- Benefit from long-term compounding
- Avoid the challenges of trying to time short-term market movements
Additionally, for investors with appropriate risk tolerance and liquidity, continuing to invest during periods of market weakness has historically been one way to enhance long-term outcomes.
By investing consistently over time, including during downturns investors may:
- Build positions at a range of price levels
- Potentially lower their average cost basis
- Be positioned to benefit from future market recoveries
This type of approach is commonly referred to as systematic investing or dollar-cost averaging. While it does not eliminate risk and markets may continue to decline after investing, it can help reduce the impact of short-term volatility over time.
Staying Focused on Long-Term Goals
During periods of geopolitical uncertainty, it is important for investors to remain aligned with their broader financial plan. Key considerations include:
- Maintaining appropriate diversification
- Evaluating liquidity needs before making new investments
- Avoiding reactionary decisions driven by short-term market movements
- A well-structured investment strategy is designed to navigate both stable and uncertain environments.
Final Thoughts
While geopolitical events can introduce short-term volatility, history suggests that markets have demonstrated resilience over time. The long-term direction of markets has been driven more by economic fundamentals than by geopolitical events alone.
For long-term investors, maintaining discipline and, where appropriate, continuing to invest during periods of uncertainty has historically been an important part of building and preserving wealth.
Important Considerations
This material is provided for informational purposes only and is not intended as investment advice or a recommendation to buy or sell any security. Historical performance is not indicative of future results, and there can be no assurance that similar patterns will occur in the future.
All investing involves risk, including the possible loss of principal. Strategies such as systematic investing or dollar-cost averaging do not guarantee a profit or protect against loss in declining markets.
Investors should consult with their financial advisor regarding their individual circumstances before making any investment decisions.