Our Insight article from the March 2026 edition of Market Insight expands on the theme of geopolitics, considering how long-term investors can better navigate the volatility it creates by analysing common market and investor behaviours. By Thomas Hyde, Junior Investment Research Analyst
Investing today can be overwhelming as news cycles and markets have become deeply interconnected. Investors may feel the need to constantly react to developments or risk falling foul of an ever-changing world. Few issues command headlines quite like geopolitics. Diplomatic spats, trade tensions and military conflicts can introduce significant uncertainty into markets. Often easy to explain with the benefit of hindsight, these events are far more difficult to predict accurately and consistently in advance.
In this article, we discuss how geopolitical shocks influence markets and consider how long-term investors can better navigate the volatility they create.
Re-evaluating investments when uncertainty arises
Financial markets dislike uncertainty, and geopolitical crises often trigger precisely that. Consider an individual investing in the stock market: they buy a company’s shares believing the future upside outweighs the downside. When a shock unfolds, be it tariffs or war, for example, the investor is forced to reassess how this event may affect their rationale, which involves accounting for a dramatically widened range of potential outcomes. These outcomes, which were previously unlikely, have suddenly become front and centre, forcing a reconsideration of whether the investment remains worth the risk. This happens simultaneously for all other investors in the market.
Understanding investor behaviour
With the pressure to act fast, or risk the market moving adversely against them, investor psychological biases can take hold.
Recency bias, the belief that recent events are most important to historical trends, may lead investors to think ‘this time it’s different’ and sell.
Herd behaviour, when investors follow the crowd, can accelerate price declines as participants rush to exit positions. This is influenced by
loss aversion, the behavioural bias whereby losses are felt more intensely than gains, leading investors to want to minimise their potential downside. With these biases in mind, it is often observed that markets sell off excessively during geopolitical crises. Moreover, modern technology such as algorithmic trading, which uses computer programmes to execute hundreds of trades every second, has the potential to exacerbate market volatility in the short-term.
Markets can recover quickly
Research by JPMorgan suggests that military conflicts tend to have a subdued impact on the market, especially over a longer time horizon. This contrasts with initial investor sentiment, which assumes that these events will trigger a sustained market decline. On average, past military conflicts have resulted in a maximum drawdown (peak-to-trough decline) in the S&P 500 – the US stock market which tracks the performance of 500 leading companies listed on US exchanges – of -4.5% following their onset. Despite this initial decline, the index recovered quickly, with recorded gains of +1.4% and +2.5% one and three months later, respectively. Although past performance does not guarantee future results, historical trends indicate that investors have typically overreacted to geopolitical conflicts, overestimating their impact on economic prospects than in reality. Those who tolerated the volatility and remained invested in the market, instead of selling into weakness, would have participated in its recovery. For example, in the lead up to the 2003 Iraq War, many commentators feared the conflict could disrupt oil markets, triggering a spike in energy prices, the impact of which would cascade into other markets. On the war’s onset, oil prices were far less volatile than expected and many investors who sat on the sidelines missed out on a recovery as sentiment improved. Over the next 12 months, the S&P 500 recorded gains of nearly 29%, highlighting the risk of trying to time geopolitical events.
Why market reaction is unpredictable
Given the history of market overreaction, it is natural for some investors to consider how to avoid losses completely or even try to profit from a geopolitical crisis. Yet these strategies are difficult to execute in practice. One may try to preempt a crisis by selling risky assets as tensions rise and hold cash; aiming to use a risk-free asset to ride out the market drawdown with the intention of participating again once markets recover. However, trading around geopolitical events is difficult due to their unpredictability. Some small tactical portfolio reallocations may work, but consistently predicting the timing and market impact of shocks is extremely difficult. Markets may continue to rise while waiting on the sidelines, and the opportunity cost of holding cash can be significant if the anticipated crisis never occurs. Even macro hedge funds, specialist investment houses dedicated to capitalising on economic change, can struggle to outperform around certain crises.
Closing thoughts
Over time, history has taught us how financial markets have exhibited resilience to geopolitical shocks. When considering conflicts, however, it is important not to lose sight of the human impact even while navigating market volatility. A well-diversified portfolio across asset classes, geographies and sectors can help reduce the impact of geopolitical volatility without the need for constant intervention. Yet, if history is any guide, an important, if unappealing, lesson emerges that short-term volatility should be an expected part of the investment process.
This article was taken from the March 2026 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of publishing but may have changed at point of reading