PUTTING THE NORTH KOREAN THREAT INTO PERSPECTIVE
Burt White Chief Investment Officer, LPL Financial | Jeffrey Buchbinder, CFA Market Strategist, LPL Financial
Investors have become increasingly concerned about the escalating North Korean threats, and understandably so. After initially shrugging off the risk, financial markets have shown increased concern over the past several weeks as the threats have become more direct (Guam) and the range of missile tests has increased (over Japan). In the latest development over the weekend, North Korea conducted its largest nuclear test and claims to have a hydrogen bomb capable of being delivered on a long-range missile. While the future of this conflict is very much uncertain, and we are sympathetic to the potential human impact of military engagement, from a market perspective, a look back at past geopolitical and military events offers a reassuring view.
HISTORICAL MARKET PERSPECTIVE
Although responses to growing nuclear capacity are more limited in number (thankfully), we do have many historical military conflicts to consider for a sense of how stocks might react. Regardless of the circumstances, looking at history to find similar conditions or events can be helpful. With help from our friends at Ned Davis Research, we compiled a list of notable military events dating back to World War I and then looked at how stocks performed after these events [Figure 1]. The market performance appears encouraging — stocks tended to react negatively on the days that the events occurred, with an average drop of about 4%; but afterwards, stocks displayed impressive resilience. Over the subsequent one-, three-, six-, and twelve-month periods, stocks have produced solid gains, on average, with gains in over 60% of the periods included. But perhaps most impressive is that the Dow Industrials were higher six months after these events 81% of the 21 occurrences, with an average gain of 10%; and over the subsequent year, stocks rose 16% on average....