“Extreme scepticism, which is typical of initial reactions to truly transformative events whether in geopolitics or financial markets, will probably turn out to be wrong.”
These words from Anatole Kaletsky, Chief Economist at Gavekal Research, are a powerful reminder of the reality that equities markets often surprise fearful investors by rapidly rebounding from events that were expected to destroy long-term value.
Consider the first six years of the current decade. During early 2020, COVID-19 shut down the world economy. The MSCI World Index and the S&P 500 each lost around a third of their value between mid-February and 23 March 2020 as countries locked down businesses and borders. Many investors disinvested at the time, and analysts were correctly predicting a dramatic decline in corporate earnings. Instead, the S&P 500 ended 2020 up 18.4%, while the MSCI World Index gained close to 16%.
Next up was the 2022 cost-of-living crisis, with Russia’s invasion of Ukraine being the catalyst. Inflation raged worldwide in the wake of massive fiscal stimulus, aggressive interest rate cuts and supply chain disruptions during the pandemic. Russia’s act of war upended energy markets and supply chains, causing markets to wobble. The MSCI World and the S&P 500 both ended the year around 18% down.
But, by the fourth quarter of 2023, markets were showing a meaningful recovery. Equities rallied strongly in response to signs that global inflation had abated and that the interest rate tightening cycle had reached its end. For the full year, the S&P 500 and the MSCI World Index returned 26.8% and 23.9%, respectively.
2024 was another year of bumper returns for these two major global indices and, as we entered 2025, market sentiment remained positive. Donald Trump’s return to the White House was purported to provide tailwinds for equities via deregulation and tax cuts. Instead, the President sent the markets reeling with his sweeping “Liberation Day” tariff plans announced on 2 April, which pulled the S&P 500 down 12% in three trading sessions. Business sentiment was justifiably overwhelmingly negative in an environment of deep disruption and pricing uncertainty. Yet the S&P 500 and the MSCI World ended the year up 18% and 21%, respectively.
This year brought a fresh shock: The invasion of Iran on 28 February led to the closing off of shipping through the Strait of Hormuz and sent oil prices soaring above $100 a barrel, with Brent briefly spiking past $120. The inflation outlook was bearish, and many commentators expected the big tech stocks driving market performance to take strain. Yet, for the year-to-date as of the end of June, the S&P 500 and MSCI World were both up close to 10%.
The sky is not always falling
Six and a half years; a pandemic, several wars, and cost crises later, the S&P 500 and the MSCI World are up 157% and 227% from the start of 2020. Even though many investors and traders had braced for the worst after each shock, the numbers show that economies and markets are far more resilient than we give them credit for. Often when investors think that the sky is falling, the initial extreme pessimism is misplaced.
The lesson is not that catastrophes do not matter, but rather that genuinely cataclysmic events can have counter-intuitive impacts on financial markets. As Anatole Kaletsky suggests, the consensus panic immediately following a transformative event is not a reliable guide to what happens next. As we saw in 2020 and 2025, some of the best returns have occurred shortly after the moments when prices reflect excessive pessimism.
The reasons markets have proven so durable in the face of the crises experienced over the past six years are complex. We have benefited from a prolonged (but not uninterrupted) rally in Artificial Intelligence (AI) and big tech stocks throughout this time. Central banks, companies and even governments have responded to change with agility. Redundant supply chains and stockpiled oil inventories have helped economies weather turbulent times. These supportive factors are sometimes forgotten when investors are fearful.
The reason for panic is often rooted in a cognitive bias that behavioural economists call loss aversion. In short, the pain of losing money hits harder than the pleasure of gaining. It is only human to want to avoid further losses when you check your portfolio and see it drenched in red following a crisis, but when you sell at the bottom of a scare like April 2026, it can turn a temporary drawdown into a permanent one.
Another version of this bias is investors sitting on the sidelines in anticipation of the next crash rather than committing money to growth vehicles such as equities. But over a ten-year or even five-year horizon, cash and bonds typically lose the race against inflation. These investors avoid all future drawdowns as markets fluctuate, but risk seeing the value of their assets erode over the longer term.
Years without a bear market
Notwithstanding all of the empirical evidence as stated above, there is a caveat.
We have not experienced a genuine, prolonged multi-year bear market since the 2008 Global Financial Crisis. Nor can market participants consistently predict with any accuracy when the next such macroeconomic event might arrive or how long it may suppress market performance.
However, what we do know is that equities have historically outperformed cash and gold over longer time frames and thus, while scepticism in the face of uncertainty feels prudent, it can be an expensive way to miss out on the opportunities that are not apparent at the time.
