Exceptional situation: one of the five biggest geopolitical shocks in 50 years
The Geopolitical Risk Index (GPR), developed by Dario Caldara and Matteo Iacoviello, has reached 350 points in weekly data. This represents a critical threshold that has only been exceeded on four other exceptional occasions over the last 50 years: the start of the war in Ukraine (2022), the 11 September attacks (2001) and the two Gulf Wars (1991 and 2003).
At the same time, the International Energy Agency (IEA) warns that the current conflict in the Middle East represents the largest disruption to crude oil prices in history. Given the severity of the situation, its members have unanimously approved a historic release of strategic reserves, while oil volatility has risen to levels not seen since the COVID-19 crisis.
No single pattern in equity market behaviour
Equity market reactions to geopolitical shocks have not followed a uniform pattern. Historically, outcomes have depended mainly on two variables: starting valuations and the duration of the conflict.
Gulf War (1991)
Operation Desert Storm consisted of 42 days of bombing followed by a rapid ground offensive. As the S&P 500 had already corrected beforehand and valuations were relatively modest, the recovery was swift and the underlying bullish trend resumed quickly.
