Ok, so now that Donald Trump has promised to unleash “fire and fury the likes of which the world has never seen” on North Korea, and now that Pyongyang has responded by threatening to bomb Guam, you might be asking yourself the following question: “what would this mean for stocks?”
That question is more urgent than it would normally be given where we are in terms of valuations and given the fact that volatility is comatose.
One certainly wonders whether a “miscalculation” by either Kim or Trump (and it isn’t entirely clear which one of those two leaders is more rational) might be the just the thing to “shock and awe” markets out of their summer lull, and finally awaken the sleeping dragon of volatility.
Ok, so in the interest of giving you a bit of context about what usually happens in the lead up to armed conflict, consider the following charts which show that no matter what you want to say about whether war is ultimately good for the economy and/or good for a President who desperately needs to give people an excuse to rally around him, history suggests that the waters have a tendency to get choppy in the initial stages.
First is Desert Storm and as you can see, in the weeks leading up to the vote, stocks fell some 5%:
As for “Part Deux”, the S&P fell sharply in the three months that led up to what would turn out to be one of the biggest debacles in U.S. military history:
And don’t forget Libya, where Muammar Gaddafi made a mistake that Kim is keen on not duplicating. In the lead up to that intervention (which created a nightmarish failed state), stocks also showed signs of angst:
Of course you can’t really talk about those conflicts and the impact on markets without discussing the concurrent impact on crude.
With North Korea, that’s not as much of a factor, but then again, recall that oil is pricing in very little in the way of a geopolitical risk premium, so direct or indirect, one certainly imagines that a mushroom cloud over the Korean peninsula could have an impact.
Anyway, there’s always the central bank backstop, so fuck it, right?