Here's how to trade a geopolitical shock

pulse

April 18, 2017 2:22 PM

Geopolitical risk is back in the headlines — but history has show time and time again these events generally do not have a sustained impact on markets.

Russian President Vladimir Putin.

Geopolitical risk creeps back into the markets.

The Russian ruble and markets fell after US President Donald Trump's surprise strike on Syria, and US stocks retreated after the US bombed Afghanistan with its largest non-nuclear bomb.

Meanwhile, the Korean won and markets tumbled

This emotional response to political shocks and risks is typical of investor (or, more broadly, human) behavior. Geopolitical events tend to make traders and investors nervous, which then sometimes leads to volatility in financial markets.

However, as history has shown time and time again, these events generally do not have a sustained impact on markets.

Reviewing data on major geopolitical events in the past 100-plus years, C

The next chart from Charles Schwab's Jeffrey Kleintopafter the

"Our analysis of 37 geopolitical developments since 1980 reveals that stocks have not always declined in response to developments that heighten geopolitical conflict. But when they have, the global stock market averaged a 3% decline with an average duration of just seven days."

And finally, although markets were in meltdown mode shortly after Britons voted to leave the European Union last June, stocks bounced back then, too, as you can see in the chart below.

To be fair, there have been a several times that markets didn't recover as quickly after seismic geopolitical events such as the invasion of France in 1940 and the Yom Kippur War (which led to a complete realignment of control over global oil), B

As an interesting side note on the geopolitical side of things, Napoleon defined "military genius" as "a man who can do the average thing when all those around him are going crazy."

As some have pointed out, the same can be said of investing.

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