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Political Risk: How Should Investors Respond?

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RANDY FREDERICK: As most people know by now, the first round of the French elections were a setback to the global populism movement. Jeff Kleintop, Schwab’s chief global investment strategist, joins me for the April 25 Schwab Market Snapshot to discuss how politics have been impacting the market. Welcome back, Jeff.
 
JEFF KLEINTOP: Thanks, Randy. It’s great to be with you.
 
RANDY: So, Jeff, there’s been a lot of focus lately about political risks, and the French elections are really just the most recent example. Is this something that investors need to be concerned about?
 
JEFF: Randy, I think the biggest political risk for investors in 2017 is putting too much emphasis on political risk. I mean, sure, on a daily basis, political headlines can nudge the stock markets one way or another. But the gains over the last six months, for example, have really been about better growth. What the longer history of data tells me is that the economy and markets have a bigger impact on politics than the other way around, and that’s important to keep in mind.
 
And we can see this in the European elections that you mentioned. You just mentioned the French elections. We’ve had the Netherlands elections, too. The outcomes have been unsurprising, unlike 2016’s votes in the Brexit and the U.S. election that maybe had a surprise outcome. But in both cases, the market outcome was the same, stocks continued to advance. It hasn’t paid to be overly cautious by focusing on the drama of political risk, even though it sure sells newspapers.
 
RANDY: Well, this is, clearly, not just a domestic issue. I mean, President Trump’s missile strike on Syria happened on the exact same day that North Korea was testing its own missiles. So what about these so-called geopolitical risks, are they the same as political risks when it comes to the markets?
 
JEFF: They are similar. The long history of U.S. missile strikes and NATO military operations shows that the market impacts of geopolitical conflicts have been small and brief in the past. Now, look, airstrikes take place almost daily as part of ongoing campaigns, such as the one against the Islamic State. But initial missile strikes and military operations can have abrupt market impacts. Our analysis of 37 geopolitical developments since 1980, so that’s 37 years—it’s like one a year—reveals that stocks haven’t always declined in response to these developments that heighten geopolitical conflict.
 
But when they have, the stock market averaged only about a 3% decline and an average duration of just seven days. So, investors are best served when grim headlines are in the news by remembering that geopolitical risks are a regular part of investing. And that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, Randy, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans.
 
RANDY: I think that’s really good advice, Jeff, thank you. That’s all the time we have for today. Listen, if you want to read more from Jeff you can do that in the International Investing section of Schwab.com. And, don’t forget, you can follow Jeff on Twitter @JeffreyKleintop. And, as always, you can follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.
Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate this risk.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Investing involves risk including loss of principal.


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