Global stock markets were disrupted a bit this week as information concluding North Korea has been able to miniaturize a nuclear weapon for potential use on a long-term missile came out late Tuesday.
Geopolitical events can certainly have an impact on financial markets, but in my experience “headline risks” as they pertain to these types of events are overblown in the short term and little staying power.
We can compare two prior crises for a frame of reference.
When we look at stock charts from the period around the Sept. 11, 2001 attacks, we see the S&P 500 down nearly 15 percent in the weeks immediately following perhaps the worst national tragedy in recent history. The market then took about 14 months to recover the immediate losses following that fateful day.
In contrast, during the Cuban missile crisis, the Dow Jones Industrial Average experienced very little volatility during the two-week confrontation, and ended up returning nearly 10 percent from October through year end.
The primary difference between the two scenarios I believe is mostly due to the underlying economic cycle of the time. During the late 1962 crisis the economy was in an expansionary mode being driven partially by President Kennedy’s tax reform and stimulus policies.
In 2001 on the other hand, the stock market was still mired in the recession that emerged in the aftermath of the tech bubble and the 9/11 tragedy provided sufficient disruption to push the economy back toward recession.
So how about today? The U.S. economy continues to grow at a steady pace, the recent corporate earnings season can only be described as solid, and headline unemployment is now below historical levels.
Does this mean the stock market won’t go down if the rhetoric continues to heat up? No, but with the substantial gains experienced since the November election in the U.S. the market may just be due for a breather anyway.
As long-term investors however, we simply don’t have enough information to make decisions based solely on what’s happening on the Korean peninsula. The impact of this particular threat, the use of nuclear weapons in conflict, is so unique and potentially calamitous it is beyond our ability to form reasonable expectations.
I’ve tried to read everything I can on the subject and find most of the available material on the subject to be largely based on exaggerated or politically charged rhetoric. Even the last report of Korean weapons miniaturization was provided by the same people who told us Iraq was teeming with WMDs and the Benghazi attacks were the result of a protest against a YouTube video, so forgive me if I’m a bit jaded and skeptical.
So, if the wacky war of words between Kim Jong-Un and Donald Trump are keeping you up at night, might I suggest turning off your 24-news channel of choice and trying a Game of Thrones catch-up marathon instead.
That being said, with the S&P 500 up a little under 20 percent since the election, who could be blamed for taking a bit of profits off the table.