Quick Bite | Don’t Overreact to the News

We have all likely seen the footage of real-time media coverage of the attempted assassination of Donald Trump, and of course it sends shivers down our spines. Fortunately, here in Australia, our political arena is not as toxic and fraught with tribal divisions and hatred as appears to be the case in the US. But rising political tensions need not be a trigger to sell investments. Market participants, especially retail investors, often respond to big negative moments in politics or global affairs by selling their shares, and yet this is often not the optimal response.

Yes, there is a lot to contend with at the moment, even apart from the US presidential election which is still almost 4 months away. There is the war in Ukraine, and Russia’s aggression across a range of fronts, including cyber and disinformation. There is the war in the Middle East, heightened tensions between China and Taiwan, and between China and several of its neighbours bordering the China Sea, including the Philippines. Let’s not forget North Korea.

Despite all these geopolitical events, share markets tend to advance regardless.

JP Morgan’s research shows that geopolitical events usually have no lasting impact on large cap equity returns. Their analysis considers equity market performance over a 3, 6 and 12 month period after each geopolitical event, comparing the results over a 3, 6 and 12-month equity market returns during periods when there was no notable geopolitical event. They conclude that in the 3 months after an event the market underperforms, on average, but 6 month and 12 month subsequent returns are identical. When you consider the average long term equity investor experience, it’s as though the event never happened.

While history doesn’t necessarily repeat itself, it often rhymes, telling investors to not overreact to the news.

Source: JP Morgan