Geopolitical Events and Investment Implications

The world can be a scary place. On a weekend that the largest news story should have been “Who will be the next Speaker of the House?”, a geopolitical event in Israel took the front page news. Hamas, a political party in the Gaza Strip designated a terrorist group by the US and its allies, launched an attack on Israel. Israel was bombarded by rockets in the air, invaded by militias in the south, and faced threats by sea in the Mediterranean. In the days since the initial attack, Israel has stabilized its country, forcing Hamas fighters out of the south, blockading and bombing the Gaza Strip, and preparing for an invasion. While the ultimate geopolitical outcome remains uncertain, many clients and non-clients alike have asked us the question, “How will this affect the markets and my portfolio?” 

It may seem insensitive to ask or answer that question in light of the atrocities that have occurred in this current conflict, but after the initial shock, it’s normal to think ‘How will this affect me?” and for most of us the biggest implication could be our portfolios. The first thing that comes to mind in any middle eastern conflict is oil. Neither Hamas nor Israel are large exporters of oil which could be why oil really hasn’t moved much. Further instability in the region like Iran or Hezbollah getting involved could move oil more, but as of now, neither has gotten further involved. The next thing that could be affected by the conflict is interest rates. Rates have been steadily rising over the past eighteen months as the Federal Reserve battles inflation, but rates are also tied to bond prices. In times of stress or trouble, the US Dollar or Treasuries are often viewed as  “safe havens”. Neither bond yields or dollar pricing has shown the typical price action (yields falling or dollar rising) that you would expect to see during a “flight to safety”. Beyond oil and interest rates, the initial economic implications of these events become less clear. In an effort to investigate what could happen to markets, we took a look at several previous incidents and saw how the markets reacted then. 

Since the year 2000, there have been numerous geopolitical events that have taken place around the world that have included an armed conflict. We looked at eight of them that would most likely resonate with investors and investigated how the market handled these events thirty days, six months, one year, five years, and ten years out from their start. In this analysis we used the S&P 500 Total Return Index (price return plus reinvested dividends) which has the ticker of ^SP500TR. We determined the value on future dates as the close of value that day or the next market day if the specific day wasn’t a trading day. For example, the Israeli-Palestinian conflict that began on September 28, 2000 (known as the Second Intifada) had an index value of 2,023.33. Approximately thirty days later, the value of the index was 1942.20*. All returns are cumulative. The results are in the table below. 

Looking at the table above, there are two things that stand out to me initially. First, there is a lot of green, which represents when the total cumulative return is positive. In fact, this occurs about  76% of the time (29 out of 38). Note, two tiles are N/A as there is not a ten year return for them. If you used the current index value, it would be a bit better at 77.5% (31 out of 40). In essence, three out of every four times markets had a positive return in the events reviewed. The probability of a positive return also increases with time as only twice were there negative returns in the 5-Yr and 10-Yr windows. 

The second thing I notice is only one of these events had a negative return under all the timeframes we chose. The Israeli-Palestinian conflict in September of 2000 coincided with a negative return across all time frames, though this conflict also coincided with the dot-com bubble and the Global Financial Crisis (GFC). The markets peaked in March of 2000 and were already trending lower by the time this conflict kicked off. Similarly, markets peaked in Fall of 2007 preceding the GFC and the severity of the crisis took time to play out. You could make the argument that those events were much more important in determining the total return than the specific middle east conflict at that time. 

This is not an absolute answer to the initial question of how the current conflict in Israel will affect your portfolio, but it is an interesting look at the past. It illustrates that over time, markets tend to perform well, regardless of geopolitical conflicts. It should help remind you that your financial plan incorporates the good times and the bad times and while these events are tragic, they should not alter your financial plan unless you are affected directly by the events. 

If you have any questions or want to discuss the data or methodology, please feel free to contact [email protected]

*The value of 1942.2 was on October 30, 2000. October 28th, 2000 was not a trading day. October 30, 2000 was the next trading day. In all instances that this occurred in the data this methodology was followed.