Why markets are relatively calm in the geopolitical storm

Sixteen of these events took place in the Middle East or stemmed from conflicts or terror groups there – such as the bombings on public transport that hit Madrid in March 2004 and London in July 2005.

After an initial impulsive sell-off, the market usually recovered the losses quickly. And the market sell-off on the latest conflict in the Gaza Strip is so far less striking than it has generally been. The bigger worry is rising interest rates.

As a group, investors seem to react differently to crises than individuals do. For individuals, history is remembered as better than it is lived. The mind tends to forget moments of uncertainty and recall the past as the good old days.

Against memories that grow sanitised with time, the latest crisis will stand out as especially dangerous. This is not irrational: in the heat of the moment, the outcome is always unclear.

When the head of the UN speaks of a Middle East “on the verge of the abyss”, and seasoned geopolitical analysts dramatically raise the odds on another world war, it is not irresponsible for people to spread the warnings on social media. The filtering of memory is a survival instinct, as is the urge to broadcast present dangers.

The collective mind of the market, in contrast, recognises geopolitical risk as a historical constant, and frames fraught moments in that context. Is it clear, for example, that the Middle East is more precarious now than during any of the major conflagrations there since the second world war? That Russia is a more dangerous power after the loss of half its combat capacity in Ukraine? That China is a greater threat today, despite the steady weakening of its economy?

The sum total of these threats is highly uncertain and debatable; the market, an aggregation of millions of views, is inclined not to rush to judgment.

I met the legendary investor Julian Robertson in the late 1990s, when the hopes for world peace that followed the collapse of the Soviet empire were erased by new risks, including India and Pakistan carrying out a series of nuclear tests. Robertson advised me, as a young rookie investor, not to overreact.

He cited his own conversations in the early 1990s with the former UK prime minister Margaret Thatcher, who told him of a risk that the Soviet Union could have used its nuclear arsenal in a last-ditch attempt to prevent the disintegration of its empire.

His point was that dire threats are ever present, even in periods remembered for tranquillity, but rarely materialise full-blown. Instead, events force leaders to take steps to prevent escalation.

The understanding of geopolitical crises as a historical constant steadies the markets in a storm. Individuals have reasons for romanticising the past while feeling anxious about the future.

The collective mind of the market, however, often seems to make more balanced, dispassionate threat assessments. And the message the markets are sending now is that our worst fears will not come to pass.

The writer is chairman of Rockefeller International.

Financial Times