With a new US presidency beginning, wars continuing to rage across multiple continents, and political uncertainty gripping Europe, it’s understandable if you feel concerned about the current economic climate and the stability of the market.

While the events of recent years may feel particularly momentous, a quick look back reveals that major upheavals are not uncommon. Just over 15 years ago, the world faced the financial crisis. Before that, there were other significant events such as 9/11, the dot-com bubble, Black Monday, and the Arab oil embargo.

Although seismic events such as these can undoubtedly influence market performance and may even precipitate significant downturns, historically, the market has bounced back.

Read on to discover how global events can affect your investments and what you can do about it.

Markets often dip in the wake of significant events

Significant events often lead to market downturns as investor confidence falls in response to the circumstances as they unfold.

For instance, during the onset of the Covid-19 pandemic, CNBC reports that the S&P 500 plummeted approximately 34% between 19 February and 23 March 2020.

As investors feared the worst for the future of the market and their earnings, many exited in hopes of limiting their losses and preserving their remaining capital, which caused the market to dip.

However, exiting the market during downturns or in response to significant events has historically proven to be an ineffective strategy for recovering losses, as dips are often short-lived and markets can be quick to bounce back.

Indeed, just a few months after the downturn at the start of the pandemic, NPR reports that the S&P 500 and other markets recovered, with the S&P reaching a record high by the end of the year.

Even after significant dips, global markets trend toward growth in the long term

Short-term dips caused by major events can be unnerving. However, if you zoom out and look at a longer-term perspective, you can see that global markets trend toward growth over long time horizons.

The graph below illustrates the growth of $1 invested in the MSCI World Index from 1970 to 2019, alongside a timeline of major global events that triggered market downturns.

Source: Harvest

As you can see, events like the subprime mortgage crisis, the 9/11 attacks, and the Arab oil embargo led to significant dips in the global market. However, the long-term trend demonstrates consistent and steady growth, which speaks to the market’s resilience over time.

Exiting the market during downturns has, historically, not been the best approach

Research by Schroders reveals that investors who moved to cash after the initial 25% decline during the Great Depression in 1929 faced a prolonged recovery period. They would have needed to wait until 1963 to break even from cash returns, whereas those who stayed invested would have recovered their losses by 1945, a full 18 years earlier.

A similar pattern emerged during the 2008 financial crisis. Investors who shifted to cash after the first 25% drop in value still would not have fully recovered their losses today. Conversely, those who remained invested saw their portfolios rebound to pre-crisis levels by around 2013.

So, while it’s not uncommon for markets to dip amid significant global events, history shows that these downturns are often temporary. Maintaining a long-term perspective and staying invested, regardless of the volatility, has typically been a more effective strategy for recovering losses.

Portfolio diversification can also help to protect you against market downturns caused by global events

Diversifying your portfolio by spreading your investments across a range of asset classes, regions, and sectors can help reduce the effect of market downturns – whatever the cause – on your investments.

Diversification helps ensure that even if one sector or market experiences a decline, others may continue to perform well, helping to balance potential losses. In addition to reducing risk, diversification also allows you to capture growth opportunities in different markets.

For instance, the table below shows the performance of global indices between 2013 and 2024.

Source: JP Morgan

As you can see, in 2020 (the first year of the pandemic) the UK’s FTSE All-Share index fell by 9.8%, while the MSCI Asia ex-Japan surged by 25.4%. However, in the subsequent year, the FTSE rebounded with an 18.3% gain, while the MSCI Asia saw a decline of 4.5%.

These contrasting performances illustrate how markets can react differently to global crises. The effects of Covid-19 varied significantly across regions, and predicting which markets will thrive during a crisis and which will recover later is all but impossible.

A well-diversified portfolio can help mitigate such unpredictability and fluctuations. It can help to protect you against market declines and allow you to maintain relative stability amid the volatility caused by crises.

Get in touch

A financial planner can help you create a tailored plan that protects your assets, optimises your investments, and ensures you’re well-prepared for any unexpected challenges and events that may be on the horizon.

To find out how we can help, please email hello@solusfinancial.co.uk or call us on 01245 984546.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Approved by Best Practice IFA Group Limited on 16/01/2025