Expert insight

How to withstand challenging markets—again

March 02, 2022

Vanguard Chief Investment Officer

Events in Ukraine are creating a human toll and immeasurable suffering. Economic responses, including sanctions, have led to market turmoil and anxiety about what may come next. An emotional reaction is natural.

When it comes to investing, however, it’s best to resist the urge to act. It’s not easy, but in a situation such as this, we suggest you steel yourself for what may come and try to keep emotions out of investing decisions.

Despite the uncertainty that has gripped the markets and the likelihood of continued volatility, we’ll one day view today’s events in retrospect. Vanguard has studied more than two dozen geopolitical events, some of which roiled the markets, and that gives us hope.

Geopolitical sell-offs have often been short-lived

Initially, markets tend to react negatively to geopolitical events, but these reactions tend to be short-lived. This chart looks at the market returns following a sell-off caused in part by a geopolitical event. On average, stocks returned 5% in the six months following the event and 9% in the 12 months after the event. The illustration depicts eight such events: the 1962 Cuban Missile Crisis, when stocks returned –5% during the initial sell-off, 21% over six months, and 26% over 12 months following the event; the 1974 impeachment proceedings of President Richard Nixon, –4% during the initial sell-off, –11% over six months, and –16% over 12 months; the 1979 Iranian hostage crisis, –3% during the initial sell-off, 3% over six months, and 26% over 12 months; the 1979 Soviet invasion of Afghanistan, –5% during the initial sell-off, 6% over six months, and 26% over 12 months; the 2003 Iraq War, –3% during the initial sell-off, 19% over six months, and 27% over 12 months; the 2011 Arab Spring, –3% during the initial sell-off, 3% over six months, and 3% over 12 months; the 2014 Ukraine conflict, –1% during the initial sell-off, 8% over six months, and 12% over 12 months; and the 2016 Brexit vote, –5% during the initial sell-off, 7% over six months, and 18% over 12 months.

Note: Returns are based on the Dow Jones Industrial Average through 1963 and the Standard & Poor’s 500 Index thereafter. All returns are price returns. Not shown, but included in the averages, are returns after the following events: the Suez Crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), shah of Iran’s exile (1979), U.S. invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1990), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), September 11 attacks (2001), multiforce intervention in Libya (2011), U.S. anti-ISIS intervention in Syria (2014), and President Trump impeachment proceedings (2019 and 2021).

Sources: Vanguard calculations, as of December 31, 2021, using data from Refinitiv.

As the illustration shows, it hasn’t taken long for equity markets to recover from initial sell-offs in response to geopolitical events. Yet we wouldn’t have predicted such quick recoveries near the onset of any of these historical sell-offs. Nor do we predict one now as markets digest fast-moving developments related to Ukraine. Rather, we want investors to remain aware of the risks.

A new challenge for markets and policymakers

Inflation, already accelerating to multidecade highs, may have impetus to climb further still, beyond Vanguard’s previous expectations, as the supply of goods from the region is constricted. Higher energy prices coupled with a potentially more challenging business environment owing to the conflict could weigh on economic growth and corporate profits. As a result, equity markets may respond poorly in the short run.

The Vanguard Economic and Market Outlook for 2022 discussed the challenges we expected for policymakers who aimed to promote still-fragile COVID-19 economic recoveries and stifle worrisome inflation. The uncertain events in Ukraine make the policy calculus, especially for interest-rate-setting central banks, more problematic than it had been.

Invariably, the markets will test investors’ resolve yet again. Such environments may turn investors toward unhealthy behaviors such as abandoning well-considered asset allocations and trying to time the market, somehow picking not only the right time to exit, but also the right time to get back in.

Don’t do it. Instead, maintain discipline and focus on what you can control, among the tenets of Vanguard’s Principles for Investing Success. They're what keeps investors, in the long run, still standing.

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How to withstand challenging markets—again

Geopolitical sell-offs have often been short-lived

A new challenge for markets and policymakers

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Thank you for subscribing to Economics & markets.

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How to withstand challenging markets—again

Geopolitical sell-offs have often been short-lived

A new challenge for markets and policymakers

Related content

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