North Korea fired a test missile that went over Japan, landing off the east coast of Japan, and the event captured the markets’ and world leaders’ attention:
- Japanese Prime Minister Shinzo Abe said this was an “unprecedented, grave, and serious threat.”
- South Korean President Moon Jae-in ordered four fighter jets to conduct bomb-dropping drills in a show of force.
- President Trump said, “All options are on the table.”
What’s really happening with North Korea?
China has been the most important player in this high stakes game, as one-third of North Korea’s exports go to China. They have the most leverage, economically, but they also don’t want a humanitarian crisis right next door. Earlier in August, China finally backed UN sanctions against North Korea. It seems unlikely that China will soften its stance. Thus, the UN appears to be resolved in putting more pressure on the hermit kingdom’s dictator. Shows of force by North Korea’s Kim Jong-un seem to be more about extracting more money and support rather than blowing things up.
How have the markets reacted so far?
The yen has rallied as traders anticipate a need for Japan to sell foreign assets, converting them into yen, to rebuild or bolster defenses. Gold has rallied as people don’t know where else to go even though in a worst-case scenario, gold can’t provide a means to stay safe in times of geopolitical conflict. Equity markets have been lower, though European markets fell more than Asian markets did. To me, this looks like a knee jerk response by the markets that will likely be fleeting, as long as our world leaders don’t demonstrate a knee jerk reaction that makes things worse.
What should investors do?
There have been many events lately for investors to feel worried about. Hurricane Harvey’s devastation is weighing on people’s hearts and minds, as we watch events in Texas unfold. Overseas, there’s North Korea. In Washington, a debt limit showdown looms.
While it’s possible all these unfortunate events can add up to something more consequential, the economy is big and resilient. When it comes to North Korea, if the U.S. was the only one condemning Pyongyang’s actions, I’d be more worried, but even China is helping to put pressure on Kim Jong-un.
While there’s plenty to worry about, it’s important for investors to not panic. What options do investors have when the President of the United States says all options are on the table? When it comes to investors’ portfolios, sometimes the best option is to do nothing. As long as the situation doesn’t blow up, this will likely blow over quickly, just as it has in the past.