Plan sponsors often look to their plan advisor to provide some perspective on the impact of current geopolitical events on the markets. This is especially the case when asset prices are high and the bears are out and about, with many predicting an imminent demise in the equity market.
Lately, the invasion of Ukraine by Russia and the emergence of a well-financed and organized group of barbarians in Iraq/Syria, as well as the Chinese buzzing of a U.S. aircraft has resulted in many (war weary) American investors being increasingly concerned about what the (mostly near-term) future holds. It doesn’t help that the visceral experience of what feels like pure chaos is intensified in this age of rapid-fire, in-your-face TV news coverage.
When meeting with DC plan sponsor clients, a plan advisor is in no position to “predict” what is going to happen. One can, however, provide an historical perspective and speak in an informed manner about current geopolitical events.
Recently, Envestnet PMC published a commentary, “A Macro View — Geopolitical Tension,” that provides good insights into the rash of current events. One passage in particular sums up their view of geopolitical events:
Geopolitical events, though they make for great television, rarely have significant and lasting impact on the U.S. economy and markets thanks to its enormous size and efficient nature. Far more significant geopolitical events in recent history such as 9/11 Terrorists Attack in 2001 and the 1998 Russian Financial Crisis had limited and temporary impact. On the other hand, we feel that U.S. internal events, such as changes in political landscape and monetary policy, are far more important.
Of course, as is always the case, no one can foretell the future. However, a thorough study of past geopolitical crises (going back at least to World War II) illustrates that, while markets may slump on what is perceived as a significant geopolitical event, they seem to always shake it off and revert to valuations that reflect “U.S. internal events.” Advisors who are able to recount past geopolitical events and subsequent recoveries can provide plan sponsors with a greater assurance that “this too shall pass.”
Besides focusing on the historical perspective of geopolitical events in general, it is helpful if the advisor can also speak with some insight about what is happening today. To recite what Fox and CNN is reporting provides little fresh news for plan sponsors. However, there are other sources advisors can tap on a regular basis that provide deeper insights into geopolitical events — minus the drama and sound bites. A good example is Stratfor, a geopolitical intelligence and advisory firm that provides global information primarily to intelligence agencies around the world. Though Stratfor saves the best analysis for their largest customers, someone who studies their free or subscription reports will still sound like the smartest person in the room when it comes to understanding the dynamics of these hotspots around the globe.
Conclusion
There have recently been (and will always be from time to time) scary geopolitical events happening throughout the world. At times, the market takes them in stride. There are other times, however, when these events can cause asset prices to slump — prices that often spring back once the world does not appear, after all, to be ending.
While a plan advisor cannot speak with certainty about whether a given event will metastasize across the globe (which is what investors fear the most), he or she can provide a historical perspective on geopolitical events and how these events have affected markets in the past. Also, by going beyond what the major news outlets deliver, a plan advisor can be prepared to go deeper into a discussion of what is happening and provide a more balanced, unemotional view of geopolitical events.
