Weekly Market Commentary 2/2/22

Geopolitical Events & Volatility

In our 2022 preview we mentioned geopolitical risk as a potential catalyst for a market correction. Lately, geopolitical risk is rising as tensions between Russia and Ukraine escalate in Eastern Europe. Financial markets are watching closely as the situation evolves. Given these headlines, you may be wondering how geopolitical events historically impact the stock market. Below is a list of 12 historical geopolitical events from past decades, and the S&P 500’s performance in the days and months after each of the events.

The data shows the stock market historically sells off when geopolitical events initially occur. The S&P 500’s average price return on the first trading day following the 12 events was -1.5%, suggesting investors sold stocks due to the initial geopolitical shock. However, the data also shows the concerns faded over the following months. The S&P 500’s average 1-month price return following the events was +2.1%, indicating the S&P 500 more than recovered its initial losses. Over the following 6 months, the S&P 500’s average price return was +7%. The two notable exceptions were Pearl Harbor, which led to further U.S. armed conflict, and Iraq’s invasion of Kuwait, which coincided with an early 1990s recession that lasted from July 1990 to March 1991.

chart of stock market and geopolitical events

Geopolitical risks are always a concern as markets do not like uncertainty.  This analysis is not intended to minimize what is occurring. However, there is limited historical evidence of geopolitical events and international conflicts impacting U.S. stock market performance over long periods of time. In the absence of a direct impact, investors historically look past such events and focus on key long-term performance drivers, such as the economic environment and corporate earnings. Unless this turns into a major global conflict, we expect markets to look beyond the current geopolitical tensions. That being noted, we still believe that the more pressing issue for the market is the Fed policy and the potential for rate hikes in the face of a slowing economy.  As is typical, investors must consider many moving factors and we will continue to keep you informed as these unfold.

Sincerely,

Dennis P. Barba, Jr.
President & Managing Partner

Michael P. Finkelstein, CFA
Partner

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the authors and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. CAR-0222-03330

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