Dow Theory: "Don't Sell on Korea News"

08/14/2017 2:51 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Verbal volleys between the U.S. and North Korea have become more heated in the last few days. President Trump has threatened the Asian nation with “fire and fury” if it endangers the United States, notes Richard Moroney, editor of Dow Theory Forecasts.

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"North Korea responded by threatening a missile launch toward Guam, a U.S. territory in the Pacific Ocean about 2,100 miles away from Korea.

Such a launch, with the missiles supposedly ending up in the water near the island, would represent less a test launch than a demonstration of seriousness from a government that has done a lot of bluffing in recent years.

We at the Forecasts aren’t political or military experts, so don’t expect us to analyze the outcomes of such military action or handicap its likelihood. However, we must consider North Korea’s threats from an investment angle. In the wake of the escalating tensions, we plan to . . . stay the course.

At first blush, that may sound like whistling past the graveyard, but no other option seems to make more sense. Here are a few reasons why:

1.) Political grandstanding isn’t a new phenomenon. The words have grown more heated than usual in recent days, but most military experts doubt North Korea wants to risk a war with the U.S.

2.) The stock market hasn’t behaved like a disaster is imminent. Sure, the S&P 500 Index fell 1.4% yesterday—something that has happened 43 times in the last five years, mostly on days when no foreign country had threatened the U.S. But over the previous three days, the S&P 500 declined a total of two points.

3.) Barring a nuclear war, military action in the distant Pacific will likely have little effect on the most important driver of stock prices in the long term—corporate profits.

Of course, Americans can’t afford to completely dismiss the North Korean threat. Only fools hide their head in the sand. But from a practical investment perspective, political rhetoric doesn’t always translate into a lasting weakness in the stock market.

If stocks put together a few more days like yesterday, we may get more worried. When the market moves in response to outside stimulus, it sometimes indicates that stocks are in weak hands. For now, we’re keeping 92% to 95% of our recommended lists in the market. 

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