Our View on North Korea
Without fail, it seems that several times a year an event or region captures the attention of the world. When this occurs, it can feel that this one event is one of the only things of any consequence going on in the world, and can have implications in every sphere of society.
The stock market is perhaps one of the greatest examples of this singular focus, as it combines both the immediate feedback of changing prices as well as a financial press that jumps on the stories that are likely to the bring the largest audience. The result is a market that in the moment seems to be driven based on a singular event, but in fact is driven by the tried and true process of companies generating profits.
The most recent singular event that has captured an audience has been the ongoing saga in North Korea. The combination of an increasingly bold dictator in Pyeongyang, with the change in tone President Trump has brought to the Oval Office has all the elements to bring uncertainty to an already volatile situation.
However, oftentimes the easiest conclusion to reach is not necessarily the most accurate one. In situations like these we find it helpful to identify the things we know and to work from there. With this situation, the most fundamental thing that we know is that the three largest players in the saga (Russia, China, and the United States) DO NOT want a nuclear war to break out. This fact is underscored by the fact that China allowed North Korean sanctions to pass through the UN Security Council last week when they could’ve used their standing veto power. In addition, China holds the key to North Korea’s future in the form of exports. The majority of North Korean GDP comes in the form of raw mineral exports to China (CIA). This means the chess master in this game is likely President Xi rather than the Kim Jong-Un.
All of this information leads us to our investment recommendations in light of the North Korean situation. Stay Diversified and Stay Invested. In the short term markets can and are driven by any number of reasons such as news headlines, but over the long-term stock prices are driven by the profitability of companies. Along these lines, American corporations have never been more efficient at turning a dollar of revenue into a dollar of profit. Through the second quarter, companies have reported 10% earnings growth (FactSet).
This does not mean that the market won’t sell off, and in fact we would not be surprised to see a healthy correction, but history has shown the best way to compound wealth over time has been to be diversified and stay the course. Should a correction materialize, we will capitalize on any opportunity given to us by the markets to re-balance into undervalued sectors just as we always have.