“We didn’t start the fire, it's been always burning since the world’s been turning.” I’ve loved this Billy Joel song since the very first time I heard it. As Billy rhythmically rants through all the scandal of the 20th century, I can’t help but find the lyrics brilliant.
Of course, this '80s song could be easily updated with a whole host of fires continuing to burn right up to today. Without challenge, concerns over geopolitical risks are the number one investment related topic I discuss with clients, peers and in social interactions around town on a day to day basis.
And for good reason. The world is a mess, and the highly charged 24-hour cable news cycle is both starved for, and driven to create, content to draw our attention at all times.
Scary sells, and with boogie men and women like Putin, Kim Jong Un, Trump, Clinton, Pelosi, Comey, Mueller and ISIS our heros and villians are never much out of the realm of consciousness. It's exhausting.
Interestingly, the planet’s largest asset management firm, Blackrock, created an index to track the concerns associated with geopolitical risks. The Blackrock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of terms associated with geopolitical risk in the press, scores the associated text of articles as positive or negative, and then distills the results into a directional index.
Bad news is up, good news is down. Right now the index is rising.
I find the concept of the indicator fascinating. After all, isn’t the noise associated with geopolitical risk the primary consequence of the topic in the first place? Yes, sometimes bad things happen to innocent people, but on a collective basis, although the end of the world is often predicted and debated, the world has in fact not yet ended.
Another interesting finding when reviewing the BGRI compared to the performance of global stock markets is there seems to be no discernible correlation between the BGRI going higher (more negative) and stock markets going lower.
When reviewing a chart of the index over the past 15 years, which is available online, it would appear that high media profile geopolitical stress is a nearly worthless tool in making investment decisions.
Now, of course, past performance in no way indicates future results, but I have to admit I was a bit surprised at the complete lack of synchrony between bad global news and stock performance. On an intuitive level it would seem the threat of North Korean missiles or ISIS attacks in Europe would put our money at risk, but maybe that’s the point.
The real drivers of stock market performance over time have always been economic conditions and corporate profitability. Other factors such as interest rates, inflation and the health of the financial system provide context for these factors, but fundamentally when a company sells more and grows its profits, the value of that company, aka its stock price, tends to go up over time.
Unfortunately, if it were just this simple, we would all be great investors, but few things in life are truly simple, and nothing good is rarely without some price. Maybe as investors, the way we actually earn our gains over time is not by ignoring all the geopolitical chatter, which in today’s world is fairly impossible, but by instead managing our response to all the noise.
So next time we are listening to “breaking news” regarding the next version of the apocalypse, as we yawn and go about our business, we can smuggly think “I just earned a little bit of the investment gains of the future.”