By: Jeff Pollock
August 11, 2017

Up until this week, market volatility had been subdued for quite some time. Following Trump’s remarks that the United States would unleash “fire and fury” on North Korea, volatility spiked to its highest level so far this year. Yesterday alone, the VIX index that tracks this sort of thing jumped a whopping 44 percent.

Obviously, hopes for a diplomatic resolution that include a deinstallation of foreign missiles are preferred to the fatal consequences that accompany war. However, if history is a guide (and it usually is), don’t be so quick to sell your stocks and jump into bonds. Whether or not Trump’s rhetoric escalates to a head on collision with North Korea, the stock market has historically fared well during these times of crisis. Bonds, on the other hand, have been a surprising underperformer.

The selloff this week can be attributed to the very uncertainty that the market cannot stand. In the past, according to Barrons, the month prior to a war has seen the Dow fall 0.6%. However, this drop has sharply reversed once military conflict began. Returns jumped to 4.0% in the first month of a war and the market advanced 6.7% in the first three months of conflict.

While the four most dangerous words in investing are “this time it’s different,” the bears make a reasonable argument that this war would involve a nuclear conflict. On July 4th, America’s Independence Day, North Korea conducted its first intercontinental ballistic missile test. Experts believe that these missiles were capable of reaching the US mainland.

While we hope for cooler heads to prevail, if history is a guide, don’t expect a war to cause a market contraction.

 

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