It’s locked and loaded. Are we referring to the U.S. nuclear arsenal, or the stock market?
President Donald Trump found a way this past week to get under the market’s skin with his colorful comments directed at North Korea leader Kim Jong-un. The president promised to unleash “fire and fury,” then claimed that the U.S. military was “locked and loaded” and ready to respond to any provocation.
News that North Korea had been able to build a nuclear warhead small enough to place atop a missile likely would have sunk the market anyway—and sink, it did. The Dow Jones Industrial Average declined 234.49 points, or 1.1%, to 21,858.32 on the week, its largest one-week slide since March. The Standard & Poor’s 500 index fell 1.4% to 2441.32, and the Nasdaq Composite dropped 1.5% to 6256.56.
But pardon us for not quaking in our boots—at least when it comes to the market. Geopolitics has a way of shaking stocks, but rarely does the damage last. The S&P 500 dropped 1.1% the day Iraq invaded Kuwait in 1990, according to Strategas Research Partners data. The index fell further in the next three months, but was up 10% 250 trading days later. Even the Cuban Missile Crisis in 1962 resulted in only a 6%-plus drop that was quickly erased. “It’s a serious situation,” says Brad Neuman, investment strategist at fund-manager Alger. “But your best bet was to stay in equities.”
Stocks are driven by economic growth. For a geopolitical event to derail a bull market, it would have to hamper the U.S. economy as well. That’s very unlikely. “I’ve never seen a geopolitical event cause a recession,” says David Rosenberg, chief economist and strategist at Gluskin Sheff. “Geopolitics can create anxiety in financial markets, but aren’t going to bring the $18.5 trillion beast, otherwise known as the U.S. economy, to its knees.”
Ah, yes, the economy. As has been the story since President Trump’s election, confidence remains high. The NFIB Small Business Index rose to 105.2 in July, while the actual data remain sluggish. Productivity rose just 0.9% during the second quarter, and the consumer price index advanced just 1.7%, missing estimates for 1.8%. None of that is exciting, but it doesn’t point to a recession either—the one thing guaranteed to bring a bull market to its knees.
The CBOE Volatility Index rose 55% last week, closing as high as 16.04, the highest level since Nov. 8 of 2016, and greater stock-market volatility could be here to stay. But don’t be surprised if stocks manage to rally through it. Michael Block, chief strategist at Rhino Trading Partners, wouldn’t be shocked to see the S&P 500 hitting a new high by the end of this week. Why the optimism? The index finished just 1.6% below its all-time high, and it wouldn’t take much—China acting on North Korea; details of an actual tax plan; or even good earnings from Wal-Mart Stores WMT -0.3223406893131664% Wal-Mart Stores Inc. U.S.: NYSE USD80.4 -0.26 -0.3223406893131664% /Date(1502485230914-0500)/ Volume (Delayed 15m) : 7832748 AFTER HOURS USD80.45 0.05 0.06218905472636816% Volume (Delayed 15m) : 72747 P/E Ratio 18.231292517006803 Market Cap 243149502269.894 Dividend Yield 2.537313432835821% Rev. per Employee 211691 More quote details and news » (ticker: WMT) or Target (TGT)—to get the market moving higher again. “North Korea will blow over,” Block says, “We could see a rally back.”
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