N. Korea sends ripples through market
Too much ‘fire and fury’ talk leading to investor anxiety
Chatter about nuclear weapons capabilities, tough talk between the U.S. and North Korea and three consecutive days of losses in the stock market might have you wondering if you should stash your cash in an underground bunker for safe keeping in case the bluster morphs into a real fight.
While that type of emotional thinking might not seem irrational given recent threats from Pyongyang and President Trump saying the U.S. would respond with “fire and fury,” rejiggering your portfolio in a major way due to the recent saber-rattling isn’t a strategy recommended by most invest- ment pros. While unsettling, the latest geopolitical scare has done little to dent the improving economic outlook.
What Wall Street does advise, however, is using this uncertain time to review your portfolio and make sure you aren’t taking on too much risk and can ride out a market drop if one occurs, says Sam Stovall, chief investment strategist at Wall Street research firm CFRA.
Indeed, given the market’s run to record highs this year in tame trading, the uncertainty caused by the North Korea crisis could trigger selling by investors sensing now is a good time to take profits.
The Dow Jones industrial average closed down Thursday nearly 205 points, or 0.9%, and is back below 22,000. It was its biggest daily point drop since May 17 and third day in a row of losses since the relationship between the U.S. and North Korea turned more contentious Tuesday. The Dow,
which hit an all-time high Monday, is down 1.25% from its peak but still up 10.5% in 2017.
Here are a few reasons why the latest geopolitical flare-up shouldn’t spook you into fleeing stocks and funneling your money to the perceived safety of havens, such as cash, gold and U.S. government bonds.
TALK OF WAR ISN’T THE SAME AS WAR
Nuclear war is what really keeps people up at night. But the preferred — and most likely outcome — is that the recent escalation in tensions between the United States and North Korea will be resolved diplomatically, not militarily. Secretary of State Rex Tillerson downplayed the risk of war Wednesday.
Wall Street pros say the main risk is if the war of words leads to combat.
“There has to be a real worry that there will be a march to war in order to sink the stock market’s buoyant tone,” says Chris Rupkey, chief financial economist at MUFG in New York. “Deep down, the market thinks the leader of North Korea may be bluffing and will never pull the trigger and actually launch a missile at U.S. shores or at a U.S. ally.”
Overreacting to something that might not even happen isn’t recommended.
THE MARKET IS RESILIENT
Main Street investors need to remember that the Dow Jones industrial average hit an all-time high of 22,118.42 on Monday and is just 1.25% below that level. The takeaway? The blue-chip stock gauge is resilient and has overcome many military confrontations and geopolitical threats in its 121-year history.
History shows that stocks tend to quickly rebound from losses resulting from war or other shocks, such as terrorism. The Japanese attack on Pearl Harbor on Dec. 7, 1941, caused the Standard & Poor’s 500 stock index to drop 3.8% the day of the attack, but it recouped its losses and was 0.3% higher a month later, data from Strategas Research Partners show.
THREATS AREN’T NEW
The escalation of tensions with North Korea can be “counted among the exogenous shocks that do unfortunately hit the markets from time to time,” says Erik Davidson, chief investment officer at Wells Fargo Private Bank in San Francisco. But past performance suggests investors would be illadvised to make big changes to their portfolios as a result. Many times, Davidson says, these “feared events don’t happen.”
The market has a habit of shrugging off geopolitical headwinds and climbing higher.