Why have markets ignored geopolitical risks in recent years?

In recent years, there has been a significant increase in geopolitical risk. And yet, markets are at all-time highs and seem to completely ignore news that should be shaking them.

Clearly, the assumption “higher political risk = falling markets” does not hold.

Markets do not price generic geopolitical risk; they price the macroeconomic and liquidity consequences of geopolitics.

Let us take the case of U.S. military action in Venezuela.

For global markets, the real question is not whether there is a war, but rather: “Does anything actually change in terms of global growth, inflation, interest rates, commodity prices, capital flows, and market liquidity?”

In the Venezuelan case, U.S. military action would likely imply an increase in oil production and greater control over inflation expectations. This is not a negative outlook for markets.

Obviously, questions may arise about the legitimacy of the United States controlling Venezuelan oil and about the erosion of international law. But the market is very cynical and pays little attention to these long-term effects.

When does geopolitics really move markets? What is it that scares them?

Let us try to draw up a checklist.

What really scares markets?

Among the geopolitically driven factors that can weigh on equity markets are:

Uncertainty: threats often move markets more than action, if the latter reduces uncertainty. When wars begin, markets often rebound. The action in Venezuela was brief and targeted; uncertainty was quickly removed. If we also consider trade wars as a form of geopolitical tension, we saw the same effect in April with tariffs: initial uncertainty crushed markets, which then rebounded once tariffs were set, even though they were significantly higher than expected.

Inflation and monetary policy: 2022 reminded us that markets become frightened when the specter of inflation reappears, especially if it becomes difficult to predict. If geopolitical crises have a lasting impact on commodities, markets may fear pressure on prices and corporate margins, as well as more restrictive monetary policies. All of this would push equity valuations lower.

Liquidity: today’s capital markets have become a massive refinancing mechanism. Any factor that blocks this process and drains liquidity from the system has extremely negative effects, as it forces deleveraging and asset liquidations. In this sense, a geopolitical event becomes dangerous if it triggers a rise in risk aversion that leads to a “flight to quality,” credit tightening, an increase in cuts, sanctions on the banking or payment system, or cyberattacks on exchanges or major banks.

Global trade flows: a geopolitical crisis is damaging if it has significant impacts on global production hubs and affects systemic inputs (chips, energy, maritime transport, etc.). These crises damage global supply chains, generate margin compression, investment cuts, and price pressures, with a negative effect on economic growth prospects.

Therefore, when facing a geopolitical crisis, we should ask ourselves:

• Does it produce a significant and prolonged increase in uncertainty?
• Does it affect energy and systemic commodities?
• Can rising costs and disruptions to production chains impact corporate profits?
• Can it fuel inflation and change the trajectory of monetary policy?
• Can it trigger liquidity stress and credit problems?

If the answer to these questions is no, or only marginally yes, geopolitics may be media-relevant but financially secondary.

Geopolitics in a context of “permanent crisis”

Since 2008, the global economy has been living in a state of almost permanent crisis: the global financial crisis, European sovereign debt, the U.S.–China trade war, the pandemic, energy shocks, U.S. regional banks, the war in Ukraine, etc.

With the rescue of the banking system in 2008, extraordinary intervention by central banks and governments has effectively become institutionalized. Each new crisis becomes a pretext for new support measures: relaxing or extending expansionary fiscal policies, maintaining more accommodative monetary conditions than expected, purchasing assets in the market, and intervening to ensure liquidity.

Do crises justify monetary or fiscal interventions?

To the list above, one final question must therefore be added:
Does the narrative generated by the geopolitical crisis offer a credible excuse for new monetary or fiscal interventions?

The threshold is already very low. For this reason, in many cases the answer tends to be “yes,” which can generate positive expectations among investors.

In a world where normality has become the exception, geopolitics tends to matter more as a narrative that justifies accommodative policies than as an autonomous shock to prices.