The fact that today marks the 100th anniversary of the inauguration of the League of Nations is evidence that world peace has always been top of mind for global leaders. Formed in the aftermath of World War I, the League was created to foster and promote the principles of international cooperation, peace, and security. While it could not prevent World War II, its successor organization, the United Nations (formed in 1946) has prevented another devastating, worldwide, large-scale military conflict from occurring over the last 75 years. However, peace has not been perfect, as it has been interrupted by multiple regional wars (Vietnam, Korea, Iraq, etc.), skirmishes (North Korea, Syria, etc.) and acts of terrorism. For the most part, the recent geopolitical risk events have had limited, if any, impact on the financial markets. In general, the more isolated the act and the further from the US the act occurs, the less impact the event has had on the markets. Even the recent escalation between the US and Iran, where top Iranian general Qasem Soleimani was killed by US forces and Iran orchestrated retaliatory attacks on US bases in Iraq, has not had a dramatic impact on most asset classes. While we are not surprised by the limited market moves so far, we outline several dynamics below that could lead to a more dramatic and sustainable impact on the economy and financial markets.
Our most recent Investment Strategy Sentiment Survey suggested that only 10% of respondents were concerned about geopolitical risks. Therefore, the greatest market risk related to the above security threats is that these possible outcomes are not currently priced into the equity market, which means any protracted event could lead to a more substantive pullback.
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