There once was a time when the threat of nuclear war hung over America’s head like a storm cloud that just wouldn’t go away. Those days, thankfully, are long over—but the sky turned a little bit grayer lately.
As you probably know, tensions have surged recently thanks to news that North Korea has “produced a miniaturized nuclear warhead that can fit inside its missiles.”1 President Trump fanned the flames even more when he stated that any attack by North Korea “will be met with fire and fury.”2
Since we are financial advisors, we’ll leave military concerns to the generals. The question we’re most interested in—and the question many people have asked us—is how all this saber rattling will affect the markets. Since we don’t have a crystal ball, there’s no way we can know for sure. But history would suggest that it won’t have much effect at all.
The financial services industry often likes to stress that “past performance is no guarantee of future results.” The reason is because we’ve seen time and time again that just because something happened a certain way before doesn’t mean it will automatically happen that way again. On the other hand, there’s another saying that’s equally valid: there’s nothing new under the sun. In this case, international crises are nothing new. That means we have a lot of history to turn to when trying to gauge just how tensions with North Korea might impact the markets.
Geopolitics and the Markets
Think back on all the major international events you’ve lived through; terrorist attacks and wars; economic recessions and elections; the Cuban Missile Crisis; the JFK assassination; the 1973 Arab oil embargo; the fall of the Berlin Wall; the 9/11 attacks; and Brexit. Unless you’re very young, you’ve probably witnessed many periods that seemed full of tension, drama, and importance.
But they rarely have much effect on the markets. Or rather, they rarely have a sustained effect.
Take the Cuban Missile Crisis. The world has probably never been closer to nuclear war than during those nerve-wracking thirteen days in 1962, yet during that time, the Dow® only fell 1.2%. By the end of the year, the Dow was up 10%.3
More recently, look at Brexit. When the UK voted to leave the European Union, it took most analysts by surprise, and many predicted it would lead to a major drop in the markets. At first, it did. The vote took place on a Thursday. The next day, the Dow fell over 600 points, and then another 250 points the Monday after.4
But less than a month later, the Dow climbed to a new record high.5
A couple of weeks ago, the business with North Korea prompted the S&P® to fall about 1.3%, its worst week in months.6 But last Monday, the S&P rose 1%, suggesting investor fear was short-lived.7
Of course, major events will sometimes cause a larger, longer drop. When World War I began, the Dow fell 30%, then closed for six months.3 After the 9/11 attacks, stocks dropped almost 15% over a two-week period.3
But even then, the markets recovered with amazing speed. For example, during the second year of World War I, the Dow rose more than 88%.3 And only a few months after 9/11, both the Dow and the S&P returned to normal.3
That’s a lot of numbers. So, what’s the takeaway from all this?
There are a few things we can learn from history.
First, we can learn that while geopolitical events often seem scary, their impact on the markets isn’t necessarily huge. That’s because many things impact the markets. Even something as big as the threat of war is only one ingredient in the dish, and it’s often buried and forgotten when the next headline hits.
If you think about it, the markets are essentially like giant aircraft carriers. It takes a lot to make them swing one direction or another, especially over a lengthy period of time.
Here’s the second thing we can learn. We said a moment ago, that geopolitical events often seem scary. We believe that’s why you often see a brief drop after they occur—because they seem scary, prompting the most jittery investors to sell.
But as you know, we must always strive to avoid making emotional investment decisions. That’s especially true when it comes to headlines and geopolitical events. Do they matter? In the grand scheme of things, yes. Do they matter to the markets? Again, yes—but not nearly as much as people think.
Remember, it’s impossible to predict what the markets will do. So, we’re not predicting here about whether the markets will climb or fall. We’re saying the recent news about North Korea shouldn’t prompt us to make assumptions one way or the other. Nor should it change how we invest.
Instead, we’ll keep doing what we always do. We’ll keep our heads and hold to our long-term strategy. In our experience, the ability to do that is far more valuable than any crystal ball.
If you have any questions about the markets, or your own portfolio, never hesitate to ask. Our team is here for you. In the meantime, enjoy the rest of your summer!
1 Joby Warrick, Ellen Nakashima, Anna Fifield, “North Korea now making missile-ready nuclear weapons, U.S. analysts say,” The Washington Post, August 8, 2017. https://www.washingtonpost.com/world/national-security/north-korea-now-making-missile-ready-nuclear-weapons-us-analysts-say/2017/08/08/e14b882a-7b6b-11e7-9d08-b79f191668ed_story.html?utm_term=.0d2f43723e39
2 Bryan Bender and Jacqueline Klimas, “Trump’s ‘fire and fury’ threat to North Korea sparks new fears of war,” Politico, August 8, 2017. http://www.politico.com/story/2017/08/08/trump-north-korea-warning-241409
3 Ben Carlson, “How markets reacted to geopolitical crises,” The Economic Times, April 13, 2017. http://economictimes.indiatimes.com/markets/stocks/news/how-markets-reacted-to-geopolitical-crises/articleshow/58158842.cms
4 Jethro Mullen, Ivana Kottsaova, Patrick Gillespie, “Dow plunges over 600 points as U.K. ‘earthquake’ crushes global markets,” CNN Money, June 24, 2016. http://money.cnn.com/2016/06/23/investing/eu-referendum-markets/index.html?iid=EL
5 Matt Egan, “Stocks have never been higher,” CNN Money, July 12, 2016. http://money.cnn.com/2016/07/12/investing/dow-stock-new-high-record/index.html
6 John Ydstie, “North Korea has markets neverous but not panicked,” NPR, August 11, 2017. http://www.npr.org/2017/08/11/542856313/north-korea-has-markets-nervous-but-not-panicked
7 Sue Chang and Ryan Vlastelica, “U.S. stocks gain 1% for the first time in 3 months as geopolitical fears ebb,” MarketWatch, August 14, 2017. http://www.marketwatch.com/story/dow-futures-flirt-with-100-point-gain-as-north-korea-fears-put-on-back-burner-2017-08-14