The chart below illustrates 11 points in history where we experienced a peak in the Geopolitical Risk Index, and it shows the return of the S&P 500 Index 12 months after that peak. In most cases, the stock market rose significantly in the year following peak geopolitical risk.
S&P 500 Index returns 12 months after a peak in the Geopolitical Risk Index.
A closer look at the Yom Kippur War
The biggest outlier in the above chart is the Yom Kippur War in 1973, followed by a severe recession and a sharp market decline. This may be concerning to investors given the parallels to today’s conflict, but there are very significant differences:
The Arab oil embargo against the United States fueled the 1970s recession. But today, the US is significantly more energy-independent than it was back then.
In the 1970s, inflation was beginning to rise. But in the current instance, inflation peaked well over a year ago - the US Consumer Price Index hit 9.1% in June 2022, falling to 3.7% in September 2023.1
The Federal Reserve appears not to be suffering from a credibility gap as it was in the 1970s. Inflation expectations are very well anchored in the US.
Footnotes
Source: US Bureau of Labor Statistics, as of Oct. 12, 2023
Investors should consult a financial professional before making any investment decisions. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. All investing involves risk, including the risk of loss. Past performance does not guarantee future results. Investments cannot be made directly in an index. In general, stock values fluctuate, sometimes widely, in response to activities specific to the company and general market, economic, and political conditions. The Consumer Price Index (CPI) measures changes in consumer prices as determined by the US Bureau of Labor Statistics. Core CPI excludes food and energy prices, while headline CPI includes them.
The S&P 500® Index is a market-capitalization-weighted index of the 500 largest domestic US stocks. The S&P 500 Total Return Index assumes that all cash distributions are reinvested.
The opinions referenced above are those of the author. These comments should not be construed as recommendations but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.