Why investors are so chill about North Korea, hurricanes, and everything else


Aside from the occasional wobble, investors continue to take the threat of military conflict, including potentially the nuclear kind, and other threats in stride.

While the markets ability to hold its own is perplexing to some observers, others argue that it makes sense given what remains a backdrop of bullish fundamentals. At the same time, the same analysts argue that investors might want to take a little money off the table.

Despite earnings growth, an improving global economy, and continued low interest rates in the developed world, some people seem to think it a bad thing that the stock market hasnt capitulated and sold off by now this year, said Andrew Adams, analyst at Raymond James, in a Wednesday note. They seem to want an investor reaction to each new narrative that gets thrown at us despite the overall story not really changing much and despite individual investors being notoriously bad at trying to time the markets.


Wall S treet sank Tuesday as U.S. investors and traders returned from the three-day Labor Day weekend, offering them the first opportunity to respond to North Koreas weekend test of what it claimed was a hydrogen bomb. The move further escalated tensions on the Korean Peninsula and contributed to fears Pyongyang is growing closer to being able to launch a nuclear weapon that could hit the U.S.

But stocks were back on the rise Wednesday despite no easing of tensions, with the S&P 500 SPX, +0.31% rising 0.3% and Dow industrials DJIA, +0.25% gaining 0.2% as major indexes traded not far off all-time highs. Stocks had seen similar wobbles in August as North Korea embarked on a series of provocations, but subsequently bounced back. Its a similar story when it comes to the devastation wrought by Hurricane Harvey or worries surrounding Hurricane Irma.


With North Korea in mind, Burt White, chief investment officer at LPL Financial, delved into the historical data surrounding stock-market performance around past military conflicts. He found that history suggests the reactions to similar events has been short-lived.


Citing the chart above, which LPL compiled with the assistance of Ned Davis Research, White summarized:

The market performance appears encouragingstocks 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.


That doesnt mean investors should just plug their ears and buy stoc ks willy-nilly, analysts said. LPL in mid-August recommended investors take some risk off the table due in part to geopolitical worries. The current backdrop is likely to continue contributing to volatility, White said.

Indeed, Adams said that expectations for a continued secular bull market dont mean there wont be any downside. Investors should exercise patience and some tactical caution until the market provides clearer near-term signals, he said.

Patience simply means that perhaps investors should be watching their positions a little more closely, that maybe they should put off making a large investment in the stock market right now until the situation becomes clearer, and that the risk-to-reward setup is fairly balanced, meaning the next move could just as easily come on the downside as the upside, Adams wrote.

Meanwhile, more conservative investors may feel the need to be even more cautious, he said, but reiterated that most long-t erm investors should probably avoid doing anything too drastic with their portfolios.