Is Venezuela Just the Start? What Financial Advisors Are Telling Clients About Geopolitical Risk.

Advisors are fielding a new wave of client questions in the wake of the weekend’s U.S. military operation to capture Venezuelan leader Nicolás Maduro. The fate of the oil-rich nation comes amid President Donald Trump’s increasingly forceful rhetoric toward nations and territories including Greenland and Cuba. All of this is taking place against the backdrop of Russia’s continuing war in Ukraine and China’s assertive posture toward Taiwan. Do today’s geopolitical headlines signal a more dangerous world for markets, or is it all a nothingburger? This week’s Barron’s Advisor Big Q asks advisors what they are telling clients now.

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Michael Rosen, chief investment officer, Angeles Investments: What I’m telling clients is welcome to the new world disorder. Venezuela, while it was not on my dance card on Jan. 1, is consistent with a pattern of heightened geopolitical risks and uncertainty. And I think investors ought to expect more of this. In terms of investment implications, I think the changing environment argues for as wide a diversification of a portfolio as one can tolerate. That means geographic diversification in particular, but really in every form. After 15 years of massive U.S. outperformance of the rest of the world, it seems likely that it’s going to be a much more balanced and volatile environment going forward.

As far as what not to worry about, it’s these geopolitical events having any sort of material impact on an investment strategy. Every significant geopolitical event in the past century has had either a modest or a very temporary impact on the markets. After 9/11, the markets were closed for a week. They opened down 10% and recovered within five weeks. After the assassination of President Kennedy, the market recovered in a matter of weeks. After what may have been the biggest geopolitical event of the past century, the bombing of Pearl Harbor, the market dropped 30% or so, but within 10 or 11 months it had fully recovered. The message is that what matters is what happens in the economy, and in particular, corporate profit. That’s what drives equity markets, not the saber rattling or chaotic political events that seem to occur on a daily basis.

Kevin Grimes, CEO, chief investment officer, Grimes & Co.: I don’t think there are any investment implications, honestly. And I find myself saying the same thing to clients with whatever the geopolitical issue of the day is. Some of these issues are very serious, and some can be very sad. But most of the time they don’t have much of a market impact at all. You can go back to our taking out nuclear facilities in Iran. That was a nonevent for the markets. The Israel-Hamas war was terrible, and a lot of people were very upset on both sides. As terrible as that was, it did not have a market impact. Even something like Russia’s invasion of Ukraine in 2022, when we were in the middle of elevated inflation here in the U.S. People worried about energy markets. They worried about the breadbasket of Europe, about supply chains. But that didn’t have much of a market impact either. If you want a geopolitical event that matters, it would be a Chinese invasion of Taiwan. Then you’re talking supply chains, you’re talking semiconductors, you’re talking the markets. It would be a big, big event and a mess. Outside of that, I don’t see any of these geopolitical events really moving markets much more than a day or so.

Brian Huckstep, chief investment officer, Advyzon Investment Management: The events that took place over the weekend should result in additional oil being traded on free markets. Many studies show that Venezuela has the largest oil reserve of all countries around the globe, so additional oil could mean a lot of new supply coming onto the market. Lower oil prices would result from additional supply. Because demand for oil is relatively inelastic—supply shifts result in relatively large impacts on price—an increase of five million or 10 million barrels, which would be an additional 5% or 10% in global supply, could push oil prices down significantly. This could potentially result in a small boost in earnings for energy-consuming corporations as costs drop, and a large blow to profits for U.S.-based energy-producing companies, as their gross revenues drop. An offsetting factor for U.S. energy producers could be a big win for one or two firms that are invited to coordinate production in Venezuela.

Stephen Kolano, chief investment officer, Integrated Partners: There’s a chart that I show clients that details the average performance of the S&P 500 through something like 13 major geopolitical events, going back to 1962 with the Cuban Missile Crisis. The message is that you never want to buy or sell investments based on geopolitical events. The chart shows that by around 180 days after the event, on average, the S&P is up like 4% or 5% on average. Every geopolitical event is different, with its own idiosyncratic characteristics that need to be considered in a broader context. But by and large, each one creates some near-term volatility, but if you think about the fundamentals, equities are driven by earnings, and unless earnings are being impacted somehow, it doesn’t impact long-term performance. 

I think if something happens in Greenland that would be a much bigger event, because it would directly attack the NATO alliance that has been in place since 1949. If you have one NATO member being aggressive towards another NATO member, that alliance could start to dissipate. And what does that mean for a new world order? The other issue is, what does it mean for China and Taiwan when you see the United States’ change of leadership in Venezuela? If China starts to show aggression toward Taiwan, where does the U.S. stand in this? Because it’s a do-as-I-say, not a do-as-I-do type of thing. So I think we’re waiting to see how the domino effect might play out.

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