What Do Tensions with North Korea Mean for the Markets?
Tension between the United States and North Korea is ratcheting up and many are now considering the likelihood of something unmanageable just a few years ago: war with the hermit state. Even the Japanese government has stepped in and called North Korea a “critical and imminent threat.”1 At a time like this, many investors might be wondering what approach they should take to this, and other geopolitical risks.
The rhetoric between the U.S. and North Korea has been going back and forth for months now; essentially, since Donald Trump entered the White House. North Korean leaders have long threatened the west with war for years, but other presidents have brushed it off as political brinkmanship.
It’s different with this administration. Both President Trump and North Korean leader Kim Jong-Un are thin skinned, use fear as a motivator, and love to have the last word.
Kim Jong-Un has said his country has a missile that can, for the first time, hit the U.S. mainland. There are fears North Korea is building biological weapons and is looking to develop an electromagnetic pulse (EMP) bomb, one that could shut down America’s power grid and kill millions.
In response, President Trump said recently that Washington was “so prepared, like you wouldn’t believe,” for any conflict with Pyongyang. “You would be shocked to see how totally prepared we are if we need to be,” Trump said.2
How imminent is war or a pre-emptive strike with North Korea? There are no immediate sings of military action and war with North Korea would not be limited to the two countries. South Korea borders the hermit state and its missiles can easily hit Japan.
That said, the U.S. Air Force is preparing to put its fleet of nuclear-armed B-52s on 24-hour alert for the first time since 1991.
How should investors respond to this and other geopolitical risks? The prices of stocks are set, in part, on expected future earnings and how investors react to geopolitical events is determined on the level of risk and scope.
North Korea recently fired two missiles, both flew over Japan and landed in the ocean. Investors responded by sending the S&P 500 down two percent. It recovered pretty quickly.
The hurricanes that recently swept through Puerto Rico and the Gulf of Mexico didn’t have a lasting effect on stocks because the financial consequences were related to a local economy and the economic impact, while devastating, was measured.
Going back to terror attacks of 9/11, the NYSE and Nasdaq were closed until Monday, September 17; the longest shutdown since 1933. On the first day of trading after 9/11, the markets fell by 7.1%; the biggest one-day loss. By the end of the week, the NYSE reported its biggest one-week loss in history and the Dow Jones lost nearly 15% of its value.
Stocks hit the hardest were those in the insurance and airline sectors; especially American Airlines (Nasdaq/AAL) and United Airlines, those were the carrier used in the terrorist attacks. Warren Buffet’s Berkshire Hathaway (NYSE/BRK/B) was also slammed.
On the other hand, some sectors did well after the attacks including some technology, defense, and weaponry firms. More broadly, six months after the attacks, and the Dow Jones had recovered all of its losses.
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- Burns, R, “North Korea is a ‘critical and imminent’ threat, Japan says,” Global News, October 23, 2017; https://globalnews.ca/news/3818970/north-korea-imminent-threat-japan/
- Vazquez, M. “Trump on North Korea: ‘We’re prepared for anything’,” CNN, October 22, 2017; http://www.cnn.com/2017/10/22/politics/trump-north-korea-china-fox/index.html
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