Should Investors Worry About North Korea’s Missile Tests?


North Korea on Wednesday announced that it had launched another missile to test its nuclear-strike capability, which reportedly can now reach the United States. Should we be concerned? Yes, of course. For obvious reasons, every citizen of Planet Earth should be alarmed when a war-mongering government threatens to use nuclear weapons. But as investors, Kim Jong Un’s provocations should be treated as noise.

In fact, the US stock market seems to be increasingly immune to North Korea’s ongoing military exercises. In 2016 and 2017 (excluding the latest launch) , the rogue regime successfully tested missiles 15 times and conducted three nuclear tests, according to Wikipedia. The initial reaction of the S&P 500 to those events over that span has evolved from sharp declines to a collective yawn, based on the subsequent five-day price changes following the dates of launches and/or tests (see chart below). It’s too soon to know how the S&P will respond to the latest event over a five-day period, but yesterday’s pop in equities suggests that investors aren’t panicking.

To be fair, it’s impossible to identify the market’s changes in history in connection with North Korea’s military actions. Stocks prices rise and fall for numerous reasons on any given day and so it’s guesswork at best to link short-term market shifts to any one event. But one thing seems clear in the chart above: the crowd appears to be increasingly reluctant to sell equities simply because Pyongyang decides to engage in another round of saber rattling.

That could change, or course. The next event could draw a darker reaction, perhaps because the missile lands closer to Japan or the US. But for the moment, the history over the past couple of years suggests that Mr. Market is looking past North Korea’s crude efforts to draw the world’s attention to its menacing behavior.

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