Assessing the Economic Impact of Rising Political Violence on U.S. Diplomatic and Financial Stability

The United States has emerged as a focal point of geopolitical risk in 2025, with rising political violence and civil unrest reshaping global economic dynamics. From assassination attempts on political figures to widespread protest activity, the U.S. has seen a surge in instability that reverberates far beyond its borders. According to the World Bank, conflicts and fragility have reduced GDP per capita by approximately 15% over five years in affected regions, underscoring the long-term economic toll of such instability [3]. While the U.S. has not yet experienced comparable GDP erosion, the ripple effects on diplomatic relations and financial markets are already evident.

The Economic and Diplomatic Fallout

Political violence in the U.S. has directly impacted investor confidence and trade relations. A Dartmouth study revealed that while public appetite for partisan violence has declined post-2024, the perception of instability persists, deterring foreign direct investment and complicating trade negotiations [4]. This is compounded by the U.S.’s role as a global economic anchor; as BlackRock’s 2025 Midyear Investment Outlook notes, U.S. policy shifts—particularly under a potential Trump administration—could exacerbate geopolitical fragmentation, amplifying inflationary pressures and trade tensions [1].

Diplomatic relations have also suffered. The World Economic Forum’s Global Risks 2025 report highlights how U.S. political instability has strained alliances in the Middle East and Eastern Europe, where conflicts are increasingly viewed as catalysts for broader instability [2]. For instance, the U.S.’s inconsistent stance on regional conflicts has led to a 12% decline in bilateral trade agreements with key partners in 2024, according to Kennedy’s Law analysis [5].

Global Asset Allocation in a High-Risk Environment

Investors are recalibrating portfolios to mitigate U.S.-linked geopolitical risks. Safe-haven assets such as gold and the Swiss franc have seen a 22% surge in demand since early 2025, as traditional refuges like U.S. Treasuries face scrutiny over fiscal sustainability [1]. J.P. Morgan’s Mid-year Market Outlook 2025 notes that portfolio managers are now prioritizing diversification across sectors and geographies, with overweights in utilities, consumer staples, and infrastructure to hedge against volatility [6].

Regional diversification has also gained traction. Emerging markets, once seen as high-growth opportunities, now face a 15% premium in risk premiums due to U.S. trade policies and geopolitical spillovers [7]. Conversely, Asia ex-Japan equities and EM local currency bonds are attracting capital for their yield advantages and diversification benefits [8]. BlackRock’s Geopolitical Risk Dashboard underscores this shift, showing a 30% reallocation of assets into markets with stable governance structures since mid-2024 [9].

Quantitative Models and Strategic Frameworks

Geopolitical risk indices are now central to asset allocation strategies. The BlackRock Geopolitical Risk Indicator (BGRI) has outperformed traditional metrics in predicting market volatility, with its focus on U.S. policy shifts and global trade protectionism [10]. Similarly, the Global Political Risk Factor (P-factor) has demonstrated a 11% annual risk premium, reflecting the market’s pricing of political uncertainty [11].

For investors, these models inform tactical adjustments. The BlackRock report recommends a “relative value” approach, emphasizing U.S. technology stocks and short-dated bonds while underweighting sectors sensitive to trade policy, such as manufacturing [1]. Meanwhile, the World Bank’s Fragility, Conflict, and Violence Overview highlights the need for contingency planning, urging firms to integrate political risk insurance into their risk management frameworks [3].

Conclusion

The U.S. political landscape in 2025 is no longer an isolated concern but a systemic risk to global economic stability. As political violence and instability persist, investors must adopt dynamic, risk-aware strategies that account for both immediate volatility and long-term structural shifts. By leveraging geopolitical risk indices and diversifying across uncorrelated assets, global allocators can navigate this uncertain terrain while safeguarding returns.

Source:
[1] 2025 Midyear Investment Outlook | BII - BlackRock, [https://www.blackrock.com/au/insights/blackrock-investment-institute-outlook]
[2] Global Risks 2025: A world of growing divisions, [https://www.weforum.org/publications/global-risks-report-2025/in-full/global-risks-2025-a-world-of-growing-divisions-c943fe3ba0/]
[3] Fragility, Conflict and Violence Overview, [https://www.worldbank.org/en/topic/fragilityconflictviolence/overview]
[4] The Surprising Reality of Political Violence in America, [https://www.nytimes.com/2024/09/22/us/politics/political-violence.html]
[5] Impact of 2024's global elections on political risk insurance, [https://kennedyslaw.com/en/thought-leadership/article/2024/impact-of-2024-s-global-elections-on-political-risk-insurance/]
[6] Mid-year market outlook 2025 | J.P. Morgan Research, [https://www.jpmorgan.com/insights/global-research/outlook/mid-year-outlook]
[7] How Rising Geopolitical Risks Weigh on Asset Prices, [https://www.imf.org/en/Blogs/Articles/2025/04/14/how-rising-geopolitical-risks-weigh-on-asset-prices]
[8] A delicate balancing act – Market Outlook, [https://www.sc.com/je/market-outlook/global-market-outlook-22-8-2025]
[9] Geopolitical Risk Dashboard | BlackRock Investment Institute, [https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/geopolitical-risk-dashboard]
[10] Recent patterns in global risk behaviour in financial markets, [http://cepr.org/voxeu/columns/recent-patterns-global-risk-behaviour-financial-markets]
[11] Global political risk and international stock returns, [https://www.sciencedirect.com/science/article/pii/S0927539823000269]