Stress test: how can an investor recognize an event that may cause a shock to the market?

"You may have been in this situation: after reading the news, you went to check your portfolio - and immediately regretted it," write Goldman Sachs managing board members Jared Cohen and Sam Morgan in article "How to Understand that a Global Event Can Shake the Market." 

Even experienced analysts are not always able to determine which events can lead to a prolonged correction in the market, they note. Goldman Sachs decided to analyze key geopolitical events over 17 years - from the Arab Spring to the current trade confrontations;

  "What we found may surprise investors," the article says. - We found that many sensational events, even military conflicts, did not have as significant an impact on markets as is commonly believed."

In contrast, often the largest swings were triggered by longer-lasting events that put pressure on the mechanisms underlying the global economy. Analysts at Goldman Sachs in their study examined swings in the prices of stocks, currencies, bonds and commodities in the period 5 days before an event and for 10 days afterward. Here are five patterns they identified: 

1. The strongest market declines are caused by events that slow economic growth or accelerate inflation

These are situations where trade flows around the world are disrupted, presenting central banks and governments with complex dilemmas. For example, the coronavirus pandemic: after the March 2020 crash, it took the stock market almost six months to recover. In the same category, Goldman Sachs analysts include Trump's duties and US trade disputes with China in 2025. 

2. Structural uncertainty is what triggers markets most.

Situations in which it is impossible to understand in advance how long a crisis will last and what changes it will lead to, shock markets more than anything else, Goldman Sachs experts say. The most vivid example is the same March 2020, when the authorities declared a pandemic and people did not understand when life would return to normal - in two weeks or two years. Amid this uncertainty, the S&P 500 index collapsed by almost 10% in a day, which was the biggest crash since 1987. 

3. Markets are not always able to correctly assess the consequences of geopolitical events 

Sometimes the market reacts to an event with a delay, and the shock effect of it manifests itself only after some time. For example, the withdrawal of U.S. troops from Afghanistan in 2021 had almost no effect on quotations: investors perceived this event as a local one because of the country's weak involvement in the global economy. "They weren't wrong," Goldman Sachs analysts wrote. - They just failed to anticipate what would happen next." Geopolitics experts now suggest that the withdrawal of the U.S. contingent from Afghanistan paved the way for Russia's invasion of Ukraine in 2022 because it sowed doubts about the U.S. commitment to its obligations and the West's deterrent capacity, the paper said.

4. Different assets react differently to shocks

Unlike equities, corporate credit markets, where companies raise funds through bonds and loans, usually do not react acutely to geopolitical events, such as China's military exercises near Taiwan or the shelling of Saudi Arabia by the Houthis in 2019, Goldman Sachs analysts said. With no risk of companies defaulting on their obligations, investors' sustained interest in reliable borrowers smooths out drawdowns in this market;

5. Markets become immune to repeated shocks

"The first time there is a shock, markets react significantly. We have seen this cycle repeat itself in recent months. Trump's duty hike in April triggered a notable market reaction. The market has reacted more subdued to further deals and announcements of further changes," said Goldman Sachs.

After each shock, markets absorbed the shock, stabilized and recovered, analysts recall. In particular, they recall how U.S. and Israeli strikes on Iran this year spurred oil prices, and Donald Trump's announcement of new duties in April caused a sharp drawdown in the stock market. But in both crises, investors recovered from the initial shock fairly quickly - many stocks have since hit new highs.

  "Our world may have become more volatile, but new risks are slowly being factored into prices," they note in the article. - The next time you hear about a supposed "catastrophic threat" to your portfolio, just exhale. Markets are resilient, and not every geopolitical event that hits the headlines will result in a long-term shock."  

This article was AI-translated and verified by a human editor