Why You Shouldn’t Worry About North Korea

September 12, 2017

Why You Shouldn’t Worry About North Korea

  • I’ll discuss how you should look at the current headlines and whether they could impact your portfolio.
  • Significant events effect the stock market on the day they happen, not in the long term.
  • We’ll also discuss what impacts stocks in the long term and how you should go about dealing with it.

Introduction

In the last few weeks, there has been a lot of media space dedicated to issues surrounding North Korea. The story isn’t quite as hot now as the two hurricanes that are unfortunately leading to human tragedy have taken over most of the headlines.

In today’s article, I want to discuss how important the news is for your portfolio. We’ll look at some past news stories, analyze their impact on stocks, assess whether you should fear what’s going on with North Korea, and if it can impact your portfolio.

Let’s start with North Korea.



North Korean Impact On Markets

Many headlines in the past few weeks have resembled the one below, creating a correlation between what goes on in the market and a missile launch in Korea.


Figure 1: Bloomberg headline from August 29 at 12:01am (author’s time). Source: Bloomberg.

The message of the story was clear, North Korea is creating turmoil and futures slip as investors become more risk averse.

Now, an eternal 8 minutes later, the headline on Bloomberg changed stating that the market was recovering as fears about North Korea eased.


Figure 1: Bloomberg headline from August 29 at 12:09am (author’s time). Source: Bloomberg.

Moral of the story, short term news has absolutely no impact on the stock market and you shouldn’t listen to nor fear such headlines, even if it might seem that the news is correlated to the stock market.

On the North Korea topic, a war is never good news as most of the consequences are paid by innocent people. However, I find it hard to imagine that the poorest and least developed country on earth armed with ancient technology could present any kind of threat to surrounding countries or to the U.S.

Nevertheless, it’s a good exercise to check on how past wars or other significant events have impacted stocks.


Figure 3: Significant events effecting the stock market. Source: Strategas Research via CNBC.

By taking a look at the above list, we can see that most of the short-term negative reactions happened on the same day of the significant event. However, things quickly change in the following few weeks and mostly turn positive in the long term.

The most significant stock market declines come from 2008, 2000, 1973, and 1940, when the issue wasn’t related to the actual events but more to a mere stock market overvaluation. In 1973, the S&P 500 cyclically adjusted price to earnings (CAPE) ratio was close to 20 with interest rates around 7%. In 2000, the CAPE ratio was above 40 with interest rates around 6.5%, while in 2008, the CAPE was above 25 with interest rates around 5%.

We can easily deduct from this is that news and what is mostly discussed in the media has no impact whatsoever on the stock market except for on the actual day it happens when people get caught by panic or euphoria.

So Should You Watch The News?

If you aren’t an avid trader sitting in front of a few screens all day long, you have no benefit from watching the news as making investment decisions based on news is futile. However, you do have to stay informed and it’s extremely important to watch for and look for fundamental news, not sensational news.

The same platform that has sensational news, like the two opposite pieces of information in an 8-minute time span described above, actually also shares some interesting stories and research that can shape your portfolio in the long term. For example, this weekend, Bloomberg wrote a story about how China is about to ban sales of fossil-fuel powered vehicles.


Figure 4: Bloomberg’s news from China. Source: Bloomberg.

That’s a piece of information that really helps in defining long term trends. This story in particular could really impact your portfolio as it will lead to less oil consumption and more demand for copper, nickel, cobalt, lithium, and all other electric vehicle related materials.

So you should watch the news, but it’s essential that you filter out all the noise and keep the important information to see how our world will be shaped in the next decades. A long term fundamental view is what can really give you an investing edge as most news is focused on short term noise while many long-term trends go unnoticed for a long time.



North Korea Isn’t A Risk To Your Stocks, Valuations & Low Interest Rates Are

If you listen to too much news, it easily leads you away from the real risks impacting the stock market. The main risks are general uncertainty about the future, and extremely high valuations for such a high level of uncertainty.

So then, the main risk is that the current stock market is clearly fueled by a decade of easy money coming from the FED, ECB, BOJ, and PBOC. Therefore, if you want to hedge or protect your portfolio, this should be your main concern, not North Korea or any other daily news phenomena.

What’s great is that you can still hedge yourself pretty cheaply. Put options on the S&P 500 aren’t that expensive, the VIX is still low, while other interesting investments are still undervalued, like gold.

Also, keep reading Investiv Daily as I’m always discussing long term issues that really have an impact on your portfolio and not the news, i.e. noise, that is pretty much just a waste of time.

By Sven Carlin Investiv Daily North Korea Share: