History is full of events that seemed like they were years away… until they happened overnight.

China’s takeover of Taiwan could be one of the next.

Earlier this week, I laid out the case for why I believe President Trump will eventually hand Taiwan to the Chinese government.

In doing so, he will also hand over the most valuable company in the world — Taiwan Semiconductor Manufacturing (TSM).

When this happens, it will go down as the single biggest geopolitical event of this century so far. It will fundamentally change the global balance of power.

The main question for investors, though, is what does this mean for your investments and portfolio?

The answer is complex.

A Tale of Two Reactions

The reality of the markets is that even if you know exactly what is going to happen, you may not know how the stock market will react.

For example, let’s say that my thesis plays out during a recession. This means there is pressure on debt-laden companies and that markets have been going lower.

Even with a relatively peaceful handover of Taiwan, the economic volatility around the event could be the catalyst to push the economy into a bigger decline.

This would hammer the markets and could create a larger bear market like the one that we saw during the Global Financial Crisis.

Alternatively, if this were to happen after the global economy has already been in a prolonged decline, then it might act as the catalyst for a global recovery.

How the markets react to specific news depends on where and how they are trading going into that data point.

Here is a chart of the S&P 500 from 2007 to 2009 during the Global Financial Crisis.

The red circles are the collapses of brokerage firms Bear Stearns and Lehman Brothers, respectively.

On the chart, you can see that they preceded a dramatic fall in the stock market.

These negative catalysts happened as the U.S. economy was weakening and amid embedded risks in the housing market. They contributed to a much steeper decline in the economy and the markets.

By contrast, here is a chart of the S&P 500 from the start of 2000 to the end of 2003.

The red circle here is the invasion of Iraq.

This was a well-telegraphed event that also happened after the markets were down a great deal. It helped set the bottom in the stock market for the decade.

How do these historical events compare to where we are with China and Taiwan right now?

Forecasting the Taiwan Shockwave

With the stock market near its highs, it unfortunately looks like we are in a position much more similar to the GFC rather than the dot-com bubble and the invasion of Iraq.

The additional complication is that the current bull market in stocks has been driven by companies focused on AI.

These companies have particularly high exposure to events in Taiwan because of TSM.

The other concerning factor is that our thesis is not out there AT ALL right now. When it emerges, it will come as a surprise to the vast majority of investors.

And finally, I don’t think this will be a quick process. But I am extremely optimistic about the outcome.

I think that Taiwan will eventually exist similarly to Hong Kong. Owned and controlled by the Chinese, but from an economic standpoint, there will be open access to Taiwanese companies.

The U.S. government may no longer be able to restrict China’s access to technology, but I think that the global economy will continue unhindered.

If the process also happens with minimal (or no) military action, then this will be a very positive outcome. Perhaps not one preferred by the U.S., but one that is good for the global economy.

The problem is that it probably won’t happen overnight. It could be a very messy process with a lot of back-and-forth.

Given the slowing global economy (look at the U.S. jobs reports!) and the impact on AI, this process could tip our markets into a bear market like the ones highlighted above.

Does this mean you should sell all of your stocks today? Not at all.

Even if I am right, it might happen in a month, a year, or even a decade.

Think about it like living in an area prone to hurricanes. There are small ones, and sometimes there are huge ones.

You don’t live every day as if one is hitting tomorrow. But you have a plan for both small and big ones. That’s the situation here.

There is a distinct probability that this particular storm hits the markets, and I want you to be prepared when it does!