Geopolitical events - wars, conflicts, terrorist attacks, political instability - have an undeniable impact on global markets. We can certainly all attest to this since the start of Trump’s second term in office and the ensuing market turmoil, as investors scrambled to navigate the geopolitical and economic fallout.

Despite the fact that over the last hundred years or so, wars, conflicts, and political crises have consistently triggered short-term volatility, history actually shows that whilst markets react sharply in the immediate aftermath of geopolitical shocks, they tend to stabilise and recover over time, and often relatively swiftly. When the world shakes, it’s important to understand the short-term impact and market reactions to these geopolitical events.

The immediate shock: market psychology at play

Markets hate uncertainty. When an unexpected geopolitical event occurs, traders and investors scramble to reassess risk, often leading to sharp sell-offs. This reaction is driven by fear and the herd mentality - two powerful forces in investor psychology. It mirrors the fight or flight instinct we rely on for survival, now playing out in the financial word. These short-term reactions highlight an essential truth though: while geopolitical events may feel like existential threats to markets in the moment, their actual long-term economic impact is often far less severe than the initial fear-driven selloff would suggest.

So, despite numerous historical examples of why these jitters are often short-lived, why the hysterics? Unfortunately, media plays a significant role in amplifying investor panic. Headlines like “Markets in freefall” and “Economic catastrophe looms” serve as unhelpful clickbait and reinforce fear, encouraging reactive rather than rational decision-making. The psychological concept of availability Human biases exacerbate this effect - people tend to overestimate the impact of recent or highly publicised events. If the news cycle is dominated by Trump’s tariff wars, for example, investors believe it must be catastrophic for markets, even if historical (and sometimes relatively recent), data suggests otherwise.

Loss aversion is another key driver of investor panic. Studies show the pain of losses is almost twice as intense as the pleasure of gains. In times of geopolitical uncertainty, this leads investors to focus on avoiding losses rather than seeking long-term opportunities, triggering selloffs that are unnecessary (and costly).

Long term market resilience

Despite the panic, history demonstrates that markets recover. World War II, the Cold War, the Gulf War, the Iraq War, Brexit - each of these geopolitical events caused short-term market declines, whilst long-term trends remained positive. Even the most extreme cases, such as the 1973 oil crisis and the Covid 19 pandemic, saw markets recover and eventually reach new highs.

The underlying reason for this resilience is relatively straightforward: stock markets are fundamentally driven by economic growth, corporate earnings, and innovation. While geopolitical shocks can cause temporary disruptions, they rarely alter the long-term trajectory of global economies. Over time, markets have consistently demonstrated they adjust, investors regain confidence, and economic fundamentals prevail.  Looking at major geopolitical shocks from the past century offer valuable insights into investor reactions and how markets have ultimately fared.

Beyond the noise - the takeaway for investors

This resilience underscores the importance of a long-term investment perspective, even in the face of uncertainty (at the risk of sounding like a broken record: the message remains crucial). It goes against human instinct, which often drives us to react impulsively to short-term events, but it’s a vital approach for navigating volatility and ensuring sustained success over time.

For long-term investors, the lesson, as always remains clear: knee-jerk reactions to geopolitical events often lead to missed opportunities. Instead of giving in to hysteria, investors should focus on diversification, a steady investment strategy, and remember the historical patterns of market resilience. The ability to stay the course during times of uncertainty is what differentiates successful investors from those who let fear dictate their decisions.

History shows that whilst headlines may scream “CRISIS”, the stock market has a way of quietly moving forward. Investors who keep their emotions in check and maintain a long-term perspective will continue to be rewarded - not despite geopolitical shocks, but because of their ability to look beyond them.