Richard Haass, president of the Council on Foreign Relations, warned Tuesday that markets face years of elevated costs as geopolitical instability becomes a persistent factor in asset pricing. Speaking at a financial symposium, Haass described the emerging "geopolitical risk tax" as a structural shift that will compress equity valuations and increase volatility across asset classes.

Market Context

Global markets have grappled with heightened geopolitical uncertainty throughout 2025 and into early 2026, driven by ongoing tensions in Eastern Europe, Middle East instability, and escalating trade friction between major economies. The VIX volatility index has remained elevated above 20, while the Cboe geopolitical risk index hit year-to-date highs in February. Equity markets have shown increased sensitivity to headline risks, with sector rotation toward defensive industries becoming more pronounced.

Analysis

Haass's warning reflects a growing consensus among institutional investors that the post-Cold War period of relative geopolitical stability has ended. The geopolitical risk tax manifests in multiple forms: higher equity risk premiums, increased hedging costs, and a persistent discount applied to international investments. Portfolio managers at major asset managers have begun adjusting allocation models to account for this new reality, with many increasing cash positions and reducing exposure to geopolitically sensitive sectors. The shift represents a fundamental change in how markets price risk, moving away from the benign environment that characterized much of the past three decades.

Key Numbers

- VIX volatility index has averaged 22.3 in 2026, up from 16.8 historical average

- Cboe geopolitical risk index reached 89.2 in February, highest since 2022

- Institutional investors report increasing equity risk premiums of 150-200 basis points

- Defensive sectors outperforming cyclical names by 4.2% year-to-date

- Average daily geopolitical headline impact on S&P 500 has increased 67% since 2024

What to Watch

Investors should monitor upcoming Federal Reserve commentary for signals on how geopolitical instability factors into policy decisions. The next round of U.S.-China trade negotiations scheduled for late March will be critical in determining whether geopolitical tensions escalate or moderate. European central bank policy meetings and any commentary on energy security risks will also provide insight into how policymakers are accounting for geopolitical costs. Key technical levels to watch include the S&P 500's 50-day moving average at 4,850 and resistance around 5,100.

Sources

Council on Foreign Relations public remarks, Cboe volatility data, Federal Reserve economic surveys, major institutional investor allocation reports

Bottom Line

The geopolitical risk tax represents a structural shift in market pricing that investors must adapt to. While the exact magnitude remains uncertain, the consensus view suggests elevated risk premiums are likely to persist, favoring defensive positioning and increased hedging in portfolios.