Investment anxiety? What to do if North Korea has you worried,
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Chatter about nuclear weapons capabilities, tough talk between the U.S. and North Korea and three straight 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 investment 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 back below 22,000. It was its biggest daily point drop since May 17 and third straight day 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
The most feared outcome is 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 U.S. and North Korea will be resolved diplomatically, not militarily. Secretary of State Rex Tillerson downplayed the risk of war Wednesday, saying he doesn’t believe there is “any imminent threat” of a nuclear attack from North Korea and that “Americans should sleep well at night.”
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.
Overreacting to something that might not even happen isn’t recommended.
A breakout in hostile actions between two nations is an “outlier type of event” that has nothing to do with normal market drivers such as the stock valuations, corporate earnings or the health of the economy, so the market impact “really can’t be modeled,” says Bill Hornbarger, chief investment officer at Moneta Group in St. Louis. “I’m not sure I would reshuffle my portfolio based on a low-probability event.”
History’s message: 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. Similarly, after the Sept. 11 terrorist attacks, the market recouped its five-session 11.6% drop in four weeks. Stocks didn’t even decline after the start of the Iraq War in early 2003.
Adds Stovall: “The S&P 500 rose 5.8% in August 1945, the month in which two atomic bombs were dropped on Japan.” Essentially, war has a poor record of disrupting Wall Street.
“Since World War II, the U.S. has been involved in many military conflicts, but most have had a very limited impact on financial markets in the short run, and almost no impact in the long run,” says Alan Skrainka, chief investment officer at Des Peres, Mo.-based Cornerstone Wealth Management.
Geopolitical 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 ill-advised to make big changes to their portfolios as a result. Many times, says Davidson, these “feared events don’t happen,” which was the case with the Cuban Missile crisis in October 1962 and fears surrounding the Y2K computer glitch that never materialized at the start of 2000.
The market has a habit of shrugging off geopolitical headwinds and climbing higher.
Davidson offers the following advice to investors that are reevaluating their holdings: “Have stock exposures crept too high given the recent run-up in global stocks? Is there enough of a bond weighting to provide ‘ballast’ to the portfolio in case of increased market turbulence? Is there enough cash available so that an investor can ride out any potential short-term market disruptions?”
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