When do geopolitical currents pull markets down?

With war raging in the Ukraine and conflict in Israel, we appear to be in the midst of a period of elevated geopolitical risk. As the FT points out, the World Uncertainty Index, which measures the prevalence of the word “uncertain” in analysts’ reports, has jumped significantly since 2021. The Vix index – which measures expected volatility – has averaged higher since 2020 than in the ten years before.

The question that many investors now have is how these levels of geopolitical turmoil will affect the markets. To get an insight, we can look at history. The 9/11 terrorist attacks in 2001 were arguably the biggest geopolitical disruption we have seen over the past quarter century. In the first week of trading after the attacks, the S&P 500 fell 11.60%, while gold and oil rallied. However, within two weeks, the S&P had recovered most of those losses and within a month it was back in the black.

In 2003, when the US invaded Iraq, the S&P 500 fell around 5% over seven trading days and took around three weeks to recover.

A notable exception is the Russian invasion of Ukraine in February 2022, where geopolitical events contaminated the global economy. The S&P 500 index fell more than 7% in the weeks immediately following the invasion, but when it became apparent that a prolonged conflict would cause major supply chain disruptions in energy, food and shipping, thereby turbo-charging global inflation, the markets weakened further, culminating in a trough of nearly 24% in October 2022, and ending 18% down for the calendar year. The short-term beneficiaries of this conflict were gold and the oil price, which peaked at $2069 and $133 respectively, but have since retraced to levels of $1966 and $93.

As these examples show, markets don’t like the uncertainty that geopolitical disturbances bring and will often drop dramatically following a negative event but will typically fully recover – even sometimes over very short timeframes – should the risks of global economic contamination prove to be unfounded.

Glenview Trust, a wealth advisor in the US, looked at 29 different geopolitical crises starting with WWII and found that on average, stocks were higher three months after a geopolitical shock, and following 66% of events, they were higher after only one month.

Markets are amoral and are unmoved by the human tragedies associated with such events.

Indeed, monetary policy and the macroeconomic climate tend to shape the markets more profoundly than geopolitical instability. The 9/11 attacks, for example, took place in the context of the dotcom bust and the accounting scandals of 2000-2002, which saw the Nasdaq Index lose 80% of its value by 2002. Old economy stocks with robust earnings were less affected.

Meanwhile, the longest bear market in recent history was the global financial crisis of 2008/09, which was not geopolitical by nature. There were four days in 2008 when the S&P 500 lost between 7-8% of its value in a single day. The market eventually reached rock bottom in March 2009 with the S&P 500 losing close to 60% of its value compared to its October 2007 peak. It took until April 2013 to reach the previous high.

And of course, more recently, COVID-19 and its fallout have shaped the markets. On March 16, 2020, the Dow fell nearly 13 percent for its largest single-day percentage drop since Black Monday in 1987. But again, markets were quick to recover when governments and central banks stepped in to support economies. Since then, monetary policy and inflation have called the shots.

Coming back to Israel, as we noted in our newsletter last week, markets have largely shrugged off the potential impact of the conflict. Unless the Hamas incursions into Israel broaden into conflicts that disrupt the global economy, the regional instability is unlikely to have longer term effects on markets – but there is always the risk of short-term volatility in response to the news cycle. In the long term, it’s the health of the world economy and corporate earnings that matter most to performance.

“The odds that stocks will be higher increases as time passes after [a geopolitical] event. In addition, stocks sometimes jump sharply after a crisis, so getting out of the market could have significant opportunity costs.”

– Bill Stone-Glenview Trust Chief Investment Officer

Global News

Should the Israel-Hamas conflict become an extended issue, this will threaten to hit the supply of oil and crimp appetite for risk assets, with Goldman Sachs Group warning that any potential equity market rally is at risk if geopolitical uncertainty escalates further.
US President Joe Biden needs to step in and resolve the war in the Middle East by starting to build a coalition now to ensure international commitment. According to The Economist, Biden is the only leader who can pull things back together. If he fails, and the security of the Middle East crumbles, it will be a catastrophe for America, too. At the same time, Israel needs to show that its fight is with the terrorists, not the people of Gaza, and it should pledge – after the war – to support a new Palestinian constitution and not strangle Gaza’s economy. However, even if President Joe Biden can persuade Israel to do so, it leaves the problem of how to provide security in post-Hamas Gaza.
China’s economy expanded faster than expected in the last quarter, growing 4.9% year-on-year and 1.3% in the three months to September from the previous quarter. It gained as people ramped up spending on everything from restaurants and alcohol to cars, offsetting a drag from the property crisis and putting Beijing’s annual growth goal well within reach.
Chinese investors sold the most US bonds and stocks in four years in August, sparking more speculation that authorities may be strengthening their position to defend a weakening yuan. The bulk of the $21.2 billion of sales were in Treasuries and US equities.
United Airlines Holdings stock dropped the most in six months after it warned that the suspension of flights to Tel Aviv and higher jet fuel costs would drag profit this quarter well below Wall Street’s expectations.
Elon Musk is lowering expectations for Tesla after years of rapid expansion that are colliding with rising interest rates and a more cost-conscious consumer. It has been price cutting, and now its margins are well below where they should be. Tesla stock declined 5.8% to $228.73 as of Thursday morning, but the stock is still up approximately 86% year-to-date.
Netflix saw its biggest growth since January 2021, thanks to a strong quarter for subscriber growth, driven by compelling content and a crackdown on password sharing. The platform added 8.76 million customers in Q3, exceeding analyst predictions, pushing its total subscribers to 247.2 million. Netflix is raising prices for some customers in the US, UK, and France, demonstrating confidence in its future, while rivals struggle financially.
OpenAI, 49% owned by Microsoft, is in talks to sell existing employees’ shares at an $86 billion valuation, according to sources. At $86 billion, it would become one of the world’s most valuable closely held companies, behind Elon Musk’s SpaceX and TikTok parent ByteDance.
Ozempic, a new class of weight-loss drugs has sent shares of everything from food and beverage companies to medical-device makers tumbling. So far, fear has driven investors to sell consumer-exposed stocks. A basket of such companies — including Oreo cookies maker Mondelez International and Modelo beer producer Constellation Brand — is down nearly 9% since early August with losses roughly double those of the S&P 500 Index.
As at Thursday’s close the S&P was down 0.5% for the week.

Local News

South Africa is likely to have its US’s African Growth and Opportunity Act status renewed despite it and the US often being on opposite sides over geopolitical crises in the past year. A strong indication of this is that the annual Agoa Forum will take place in Johannesburg between 1-4 November.
Standard Bank CEO Sim Tshabalala believes that electricity constraints will start to lift over the next year-and-a-half. The energy crisis has stifled economic growth for more than a decade. Pick n Pay chairman Gareth Ackerman says loadshedding is a contributing factor to South Africa facing one of its most difficult periods since 1994.
The Netherlands and Denmark have joined South Africa’s Just Energy Transition Partnership with other European countries, pledging $333 million to help the country transition away from coal. South Africa’s transition will serve as a prototype for similar pacts with Indonesia, Vietnam, and Senegal. Initial members of the pact – the European Union, Germany, France, the US, and UK – pledged $8.5 billion in finance.
Daily Maverick’s Tim Cohen writes that the fiscal crisis is “very real,” and it’s not just the ANC and unions who don’t want budget cuts. Cohen says the increasing number of those (including academics) who don’t want spending cut is a dangerous situation as National Treasury is being sidelined in favour of spendthrift departments.
Inflation rose to a three-month high in September on the back of higher food and energy prices, which pushes the case for the South African Reserve Bank to keep borrowing costs higher for longer. It gained to 5.4% last month from 4.8% in August, broadly in line with economists’ expectations.
The Competition Commission is investigating digital content in South Africa and the advertising technology markets that link buyers and sellers of digital advertising inventory, as it is concerned that social media platforms and search engines are eroding local media. It is concerned that Google, TikTok, YouTube, Facebook, Twitter/X, and others have unfair advantages and market practices, which are damaging the local news media sector.
Mega online retailer Amazon wants local sellers to sign up to its platform ahead of its official launch in South Africa. It will be open for business sometime next year. Gugu Lourie, founder and editor of TechFinancials, believes that Amazon’s pending arrival in South Africa presents a problem for local market leader Takealot at a time when the post office is broken. The likely pressure to innovate could potentially lead to a renaissance in the local e-commerce landscape, benefiting consumers with enhanced options and experiences.
Pick n Pay did away with its interim dividend as it made a loss in the six months to 27 August because of further blows from load shedding and increased competition. This is its first ever interim loss and comes just after it brought back former CEO Sean Summers. Summers said the figures were so bad that the best thing about them is that founder, the late Raymond Ackerman, wasn’t around to see them.
Sasol, BMW South Africa, and Anglo American Platinum are set to launch a pilot fleet of green hydrogen-powered vehicles.
London-listed Primary Health Properties is set to join the JSE later this month despite the trend of companies delisting. It owns more than 500 buildings across the UK and Ireland that are let to doctors, pharmacies, dentists, and other health-care service providers.
At the time of writing, the rand was 0.8% weaker and the ALSI was 3.8% lower for the week.