Investing in Uncertain Times: Wars, Tariffs, and Market Volatility

Open any financial news site on any given day and you'll find reasons to be alarmed: wars, tariffs, inflation fears, recession warnings, political upheaval. Yet the U.S. stock market has returned roughly 10% per year on average over the past century, through two world wars, the Great Depression, the Cold War, Vietnam, oil embargoes, 9/11, the 2008 financial crisis, a global pandemic, and more. How is this possible? Because markets price in future earnings, not headlines. Companies adapt. Supply chains reroute. Consumers shift behavior. Businesses that operate during crises still generate revenue, pay wages, and produce earnings. Markets are not a vote on whether the world is safe; they are a continuous auction for the present value of future corporate cash flows. Bad events hurt earnings temporarily, but markets are forward-looking and typically recover faster than most investors expect.

Research on how markets react to specific geopolitical events is consistent: the initial reaction is almost always negative, and the subsequent recovery is almost always faster than investors fear. A landmark study by Ned Davis Research tracked the S&P 500 across dozens of major geopolitical crises from World War II through the early 2000s. The median decline was about 5%, and the median time to recovery was about 47 days. Even 9/11, arguably the most traumatic single-day event in modern American history, saw the S&P 500 recover to pre-attack levels within 31 trading days. The pattern holds across wars, terrorist attacks, and political assassinations. The key mechanism: geopolitical events create temporary uncertainty that makes investors demand a risk premium. Once the situation clarifies, even if it clarifies into a prolonged conflict, markets reprice and move on. The exception is events that fundamentally alter economic fundamentals (the 1973 oil embargo, which triggered lasting inflation and recession, is the canonical bad example).

Behavioral finance research consistently finds that the average retail investor earns significantly less than the funds they invest in, because of bad timing. The DALBAR QAIB study has tracked this gap for decades: over the 30 years ending in 2023, the S&P 500 returned about 10.2% annually, but the average equity mutual fund investor earned about 6.4% annually. The gap exists almost entirely because of panic selling at bottoms and enthusiasm buying at tops. During COVID-19 in March 2020, millions of investors sold stocks at the bottom of the worst market crash since 2008. The S&P 500 then proceeded to recover all losses in just 5 months and finished 2020 up 16%. Investors who sold in March 2020 and waited for safety locked in their losses and missed the recovery. The cruelest irony of market volatility is that the moments that feel most dangerous, when headlines are worst and portfolios are down 20-30%, are often the best times to stay invested or even add more.

The current tariff environment provides a live example of this dynamic. In January 2026, a single tariff threat, tied to the Greenland dispute, wiped $1.2 trillion in S&P 500 market cap in a single session. By the following week, the threat was walked back and markets recovered most of the loss. Investors who panic-sold on the headline locked in real losses. Investors who held (or bought on the dip) recovered. J.P. Morgan estimated a 35% recession probability in 2026 as of early in the year, higher than normal but still implying a 65% chance of no recession. Markets went negative for the year in early February before recovering. Through all this volatility, the underlying question remains: are the businesses in your portfolio generating earnings, paying dividends, and compounding their value? For most broad index fund holders, the answer is yes, and temporary geopolitical noise doesn't change the long-term trajectory.

War is terrible for humanity but creates complex investment dynamics. The Russia-Ukraine war that began in 2022 caused an immediate European market selloff and an energy price spike, but also triggered a multi-year bull market in defense stocks. Companies like Lockheed Martin, RTX (Raytheon), Northrop Grumman, and European defense firms like Rheinmetall saw stock prices double or more as NATO countries raced to rearm. NATO allies are now debating spending targets of 3.5% of GDP on defense, up from 2%, which represents hundreds of billions in additional government contracts for defense manufacturers. Conversely, a peace deal or ceasefire can be negative for defense stocks in the short term but positive for broader European equities. A Ukraine peace settlement could reduce the geopolitical risk premium embedded in European indices, a tailwind for diversified international exposure. The ethical dimension is real: some investors exclude defense stocks for moral reasons, and that is a legitimate personal choice. But for those without such constraints, defense exposure has historically provided both returns and portfolio diversification.

Here is a practical mental framework for navigating uncertainty without panic: First, separate noise from signal. Most headlines, including tariff threats, diplomatic spats, and political rhetoric, are noise. Signal events that actually shift corporate earnings trajectories are rarer. Second, check your investment horizon. If you need this money within 3 years, it shouldn't be in stocks regardless of geopolitics. If your horizon is 10-20 years, short-term volatility is irrelevant. Third, resist the urge to act. The bias to action in a crisis is powerful but usually harmful. When portfolios are down 10-15%, the feeling of 'I should do something' is nearly universal and nearly always wrong. Fourth, use volatility as a buying opportunity if your situation allows. If you have excess cash and a long time horizon, market corrections of 10-20% represent discounts on future returns. Dollar-cost averaging into a declining market is mathematically advantageous. Fifth, maintain diversification. A diversified portfolio including domestic equities, international equities, bonds, and possibly real assets (gold, REITs) will perform better across a range of outcomes than a concentrated bet on any single scenario.

Staying the course doesn't mean ignoring everything. There are legitimate reasons to adjust your portfolio during uncertain times. If your asset allocation has drifted significantly, say stocks grew from 70% to 85% of your portfolio during a bull market, rebalancing back toward your target is always appropriate, regardless of macro conditions. If your personal financial situation has materially changed (job loss, major expense approaching, change in risk tolerance), adjusting your portfolio to match your new reality is rational, not panic. If you're holding concentrated single-stock positions in sectors directly in the crosshairs of a specific risk (a pharmaceutical company under tariff threat, for example), moderate diversification is prudent portfolio management. And if an investment has fundamentally changed its business, not just a price drop but a genuine change in earnings power, reassessing is appropriate. The key distinction: changes driven by rational analysis of your personal situation and portfolio fundamentals are good. Changes driven by fear and news headlines are almost always destructive.

The best defense against macro uncertainty is a portfolio you can actually hold through turbulence. This means: own broad index funds rather than concentrated single stocks (individual companies can be permanently impaired; broad markets historically recover), maintain a cash cushion outside your investment portfolio (3-6 months of expenses in HYSA or short-term Treasuries), keep bond exposure appropriate to your time horizon (bonds provide ballast when stocks fall, even imperfectly in rising-rate environments), and avoid leverage (borrowed money amplifies losses and forces selling at the worst times). For most individual investors, the right portfolio is one that can be completely ignored for 5-10 years during the worst of headlines. If you'd sell during a 30% crash, your allocation is too aggressive; reduce risk in calm markets, not during panics.