When cannons roar, markets often panic first and think later

The global macro backdrop stayed broadly resilient with US earnings showing healthy industrial and consumer trends. Japan’s political clarity supported sentiment while Europe’s recovery remained uneven and emerging markets faced ongoing currency volatility amid faster reserve diversification.

They can be volatile, excitable and easily swept up in fashionable fads, usually due to a new technology. They lurch, surge and wobble on incomplete information. Yet when it comes to geopolitical shocks, history shows that their bark is usually worse than their bite.

Caldara and Iacoviello’s Geopolitical Risk Index, built from systematic searches across ten major newspapers, spikes around events such as the Cuban Missile Crisis and 9/11. These spikes typically coincide with short‑term pressure on investments and equities but not sustained bear markets. Once uncertainty stops rising markets tend to stabilise.

Invesco illustrates the one-year returns following each peak in geopolitical risk. Across major geopolitical shocks since the 1970s, the MSCI World Index delivered an average one‑year return of 7.8% following peaks in the Geopolitical Risk Index. There are a handful of notable exceptions. The 1973 Yom Kippur War produced a large drawdown of 35.5% due to an oil embargo triggering an unexpected US recession. Russia’s invasion of Ukraine in 2022 similarly produced an oil shock, while the market decline following the September 11 attacks were more related to the dot com hangover.

Viewed together, the pattern is not of markets serenely gliding through crises, but of markets that react sharply yet recover with surprising reliability.

The global macro backdrop stayed broadly resilient with US earnings showing healthy industrial and consumer trends. Japan’s political clarity supported sentiment while Europe’s recovery remained uneven and emerging markets faced ongoing currency volatility amid faster reserve diversification.

They can be volatile, excitable and easily swept up in fashionable fads, usually due to a new technology. They lurch, surge and wobble on incomplete information. Yet when it comes to geopolitical shocks, history shows that their bark is usually worse than their bite.

Caldara and Iacoviello’s Geopolitical Risk Index, built from systematic searches across ten major newspapers, spikes around events such as the Cuban Missile Crisis and 9/11. These spikes typically coincide with short‑term pressure on investments and equities but not sustained bear markets. Once uncertainty stops rising markets tend to stabilise.

Invesco illustrates the one-year returns following each peak in geopolitical risk. Across major geopolitical shocks since the 1970s, the MSCI World Index delivered an average one‑year return of 7.8% following peaks in the Geopolitical Risk Index. There are a handful of notable exceptions. The 1973 Yom Kippur War produced a large drawdown of 35.5% due to an oil embargo triggering an unexpected US recession. Russia’s invasion of Ukraine in 2022 similarly produced an oil shock, while the market decline following the September 11 attacks were more related to the dot com hangover.

Viewed together, the pattern is not of markets serenely gliding through crises, but of markets that react sharply yet recover with surprising reliability.

MSCI’s analysis [1] indicates that a sustained disruption to oil flows through the Strait of Hormuz that lifts oil prices by about 20% would push breakeven inflation higher and reduce US equities by around 12% within the scenario horizon. In other words, the macroeconomic channel does the damage, not the geopolitical headline.

A further complication is that many of today’s investment professionals have not actually managed money through a major geopolitical crisis.

The industry has grown younger and promotion cycles have accelerated, leaving a cohort whose exposure to past shocks is academic rather than lived. Collective memory is thinner than it once was and behavioural anchors are less widely held. This generational shift does not change the historical evidence, but it does influence how reactions play out in real time.

Investors may get spooked, overshoot or chase fads, but geopolitical shocks rarely alter long-term return paths unless they spill into inflation, energy supply or credit conditions.

Markets panic first, think later and usually move on well before the headlines do.

So when cannons roar, markets do not yawn out of indifference. They yawn because by the time the headlines peak, they have already started thinking ahead.