After a historically strong start to the year, markets have now pulled back 2.5% to begin the second quarter. Concerns around geopolitical tensions in the Middle East, inflation, corporate earnings, and other issues have led to a market decline, pushing the VIX index of stock market volatility to its highest level in six months. In times of market stress, it’s important for investors to maintain their perspective on critical issues and not overreact to headlines. How can investors understand and weather this period of market volatility?
First, tensions escalated in the Middle East due to an attack by Iran on Israel, the first time a direct strike has occurred between the two nations. The attack involved hundreds of drones and missiles launched from Iran and appears to have been designed to allow ample time for Israel and its allies to deploy countermeasures, resulting in minimal damage. While it’s uncertain how Israel might respond to this shot across its bow, many hope that both nations will show restraint and avoid an overt conflict.These latest developments only add to geopolitical concerns around the world. Russia’s invasion of Ukraine and the October 7 attack on Israel by Hamas only a year and a half later have already destabilized Eastern Europe and the Middle East. Without diminishing the tragic loss of life and destruction from these conflicts, investors must weigh how such events might impact the global economy, markets, and their portfolios.
Geopolitical headlines can be alarming to investors since they are unlike the typical flow of business and market news. However, history shows that while geopolitics can impact markets, the effects are typically short-lived. The accompanying chart highlights market returns following major geopolitical events this century. Some events, such as 9/11, changed the world order and had long-lasting effects, even though it was primarily the dot-com bust that led to poor market performance. Other events, such as the war in Ukraine, resulted in higher oil prices which affected inflation and monetary policy. Most of these events did not have long-lasting effects on markets once the situation stabilized.While today’s conflicts will be closely watched, investors ought to avoid passing judgment with their portfolios. In the long run, markets tend to recover and perform well primarily because business cycles are what matter over years and decades, despite the events that take place over weeks and months.
The bottom line? Markets struggled at the start of the second quarter due to changing expectations around the Fed and escalating geopolitical tensions. Staying level-headed and keeping these events in perspective are still the best ways to achieve long-term financial goals.
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