Will North Korea End the Bull Market?

The good times continued to roll in investment markets throughout the third quarter and year-to-date. Below is a report card of various investment categories around the world:

Investment

Q3 Return

YTD Return

Cash

0.25%

0.56%

U.S. Bonds

0.85%

3.14%

U.S. Stocks

4.48%

14.24%

Developed International Stocks

5.40%

19.96%

Emerging Market Stocks

7.89%

27.78%

     

Cash is represented by the Bloomberg Barclays 1-3 Month T-Bill index, U.S. Bonds are represented by the Bloomberg Barclays US Agg Bond index, U.S. Stocks are represented by the S&P 500 index, Developed International Stocks are represented by the MSCI EAFE index, Emerging Market Stocks are represented by the MSCI Emerging Markets index. Indexes are unmanaged and unavailable for direct investment. Past Performance is not a guarantee of future results.

The U.S. stock market continues to reach all-time highs, boosted in part by companies earning record profits. Non-U.S. stocks are also doing phenomenally well. The global economy is experiencing synchronized growth and U.S. household net worth is over 40% higher than the peak in 2007. You’ve likely seen the benefit of rising asset prices reflected on your personal financial statements.

While everyone loves a bull market, we are constantly on the lookout for what might facilitate the end to this one. There’s no shortage of nerve-racking headlines every day, whether it’s horrendous natural disasters, terrorism, a seemingly dysfunctional federal government or saber-rattling between Donald Trump and Kim Jong-un of North Korea. Up until now, the market has largely shrugged off these risks and continued higher. Still, we want to assess these risks, among others, to see if they might be a catalyst for the next recession/market downturn.

This quarterly commentary will look at the North Korea situation and potential impact on investment markets should the rhetoric escalate to a full blown conflict. As you are aware, we’ve seen an increase in tension between the leaders of our country and North Korea in the last couple of months. North Korea has tested intercontinental missiles and continues to poke the “sleeping giant”. President Trump has returned jabs via his infamous Twitter account. It’s no surprise investors are concerned about the prospect of a conflict with a nuclear-armed enemy. While we don’t know what will happen with this situation, we can look back in time at other geopolitical crises and analyze market reactions around those events.

Typically, when news of war and other geopolitical crises hit, markets have an upfront, kneejerk reaction and selloff. Then, as investors have more time to digest and analyze the economic risks, more often than not, stocks recover the decline shortly thereafter. 9/11 is a perfect example of this. Between September 11th and September 21st the S&P 500 fell -11.6%. By October 11th, it had recovered all of the decline. Of course this is just one example, but on average this tends to be the experience.

Why do we see a similar pattern in prior geopolitical crises? I believe the answer is investors are human and we succumb to what Israeli psychologist, Daniel Kahneman, calls our “System 1” thinking. According to Kahneman, System 1 thinking is our quick, emotional, intuitive and reflexive thinking. This is our fear-based, cut-and-run selling when we hear of a geopolitical crisis. This is followed by our “System 2” or slow, deliberate and logical thinking. This is when we actually sit down and evaluate the situation from a fundamental and investment standpoint. Is going to war with Al Qaida, in the 9/11 example, going to cause U.S. companies to earn less money for their shareholders, economic growth to slow, or inflation and interest rates to change materially? Typically the answer is no, which is why the market tends to bounce back.

While geopolitical risks are certainly important and potentially devastating from a humanitarian standpoint, they very often do not translate into changing the direction of the global economy and investment markets over any meaningful timeframe. The ultimate driver of investment returns are economic growth, corporate earnings, inflation, interest rates and valuation (or the price paid). This is why we focus our market indicators on these factors to proactively manage portfolios.

With regard to North Korea, I am no military expert or political scientist, but my personal opinion is Kim Jong-un is looking out for his best interest. I believe he wants to rule for a long time and going to war with the U.S. would likely mean an end to his regime. I also believe China, who has a working relationship with North Korea, has a vested interest in avoiding war and the possibility of a U.S. presence along its southern border. Therefore, I am confident cooler heads will prevail.

Lastly, market corrections, whatever the cause, are normal and healthy. Since 1980, for the years the market has ended with a positive total return, we’ve seen an average -11.5% decline at some point during the year. This year we’ve only seen a 3% decline intra-year, which could be giving investors a false sense of complacency. Our goal is to have clients invested in the portfolio that will allow them to ride out the inevitable, next downturn, and, this is key, before it begins. If you would like to schedule a meeting to discuss your portfolio or if you have any questions, please don’t hesitate to reach out to your Advisor.

Author:
Mike Gallagher and the TPG Investment Committee

This information is provided for general purposes and is subject to change without notice. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. The information has been obtained from sources considered to be reliable, but it is not guaranteed. Past performance is not a guarantee of future results.


Securities and advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Advisory Services offered through TPG Financial Advisors, LLC, a Registered Investment Advisory Firm.

2018-06-21T13:47:23+00:00

Employee Benefits

The Employee Benefits Division of The Partners Group serves the employee benefit needs of over 500 West Coast employers, with offices in Portland, Lake Oswego, and Bend, OR; Bellevue, WA; and Bozeman MT. Our benefits consulting team specializes in providing a highly-consultative approach coupled with problem-solving wellness analytics, to help employers reduce healthcare costs, improve employee health, and create long-term health plan stability.

Business Consulting

The Business Consulting Division of The Partners Group is dedicated to consulting with healthcare systems and jumbo employers to manage the health and well being of their employees, families, and communities. Our focus is to provide an innovative, solution-oriented service that capitalizes on data to pinpoint potential problems. Whether it be uncovering potential sources of escalating healthcare costs, or other anomalies in data, this service provides endless, problem-solving advantages to a variety of industries.

Commercial Insurance

The Partners Group Commercial Insurance Division manages the business risks for hundreds of employers. We provide an unmatched depth and breadth in commercial insurance and risk management services combined with extraordinary people who possess an unusual ability to connect on a personal level. We work hard to understand the unique risks and exposures of your business, and identify the solutions to provide the right coverage for the right price. As an independent company The Partners Group can tailor solutions to work specifically for you, even creating new policies and programs, if that’s what you need.

Private Client Services

The Partners Group Private Client Services Division advises business owners and high income shareholder groups comprising just over 3,200 successful individuals, families and medical professionals on investment services, retirement planning, and personal insurance. We’ve been in business for over 30 years as a privately held company based in the Northwest, and we’re here to stay. Additionally, we are not tied to products and plans. We provide various platforms and a multitude of options to fit your needs, which can change over time as your life changes. When you work with TPG Private Client Services, you’re dealing with the shareholders of this firm, and we are honored to play a role your life, your family’s lives, and your next generation’s lives.