Geo-political tensions between North Korea and the US were the main cause of stocks finishing in the red last week. The Dow had its worst weekly loss for the year down 1.1% while the S&P 500 had its second worst drop, down 1.4%. The VIX, or the fear Index, spiked all the way up to over 15 at one point.
But not to worry! Monday, US stocks recaptured more than half of last week’s loss and the VIX dove straight back down to 10. Apparently, Trump threatening a certifiable psychopathic dictator with nuclear capabilities that he will bring him down with “fire and fury” “like the world has never seen before”, is not really that big a deal. Nor was Kim Jong-un’s response that he was going to launch missiles capable of carrying a nuclear war head at Guam, just for practice. Well, I guess that was all just saber-rattling and you know, “boys will be boys”.
Trump, unlike Obama, seems unlikely to back down from his “red lines”. We have far more important things to do, like lowering taxes and re-building our infrastructure and health care reform. Trump will be lucky to get anything accomplished if he is forced to continue to play brinkmanship with a lunatic.
There is a great opportunity here for Trump if he can bring China into the fold as an ally of the US against nuclear proliferation and as compatible trading partner among the super powers in the new world order.
Taken in context, last week was probably just an inconvenient distraction from some positive reports.
1. The Consumer Price Index and the Wholesale Price Index both came in lower than expected. In a world where bad news is good, the chances of the Fed raising rates again this year decreased significantly.
2. Auto sales surprisingly up-ticked last month.
3. Solid Q2 Corporate earnings are pushing Indices to new record highs. There is a word of caution here as market internals are crumbling. The narrow indices are hitting new highs but fewer stocks are participating.
4. Pending home sales surged.
5. And, consumer sentiment is exceptionally high on the economy, personal finances and the stock market. Unfortunately, the consumer is almost never right.
So, there was some good news and some truly horrific news. What is the plan now? If you are hoping nothing really bad happens, hope is not a plan. I would advise that it is never a bad time to review your investments, your asset allocation, and your risk profile. The addition of managed futures may lower risk and add crises alpha to your stock and bond portfolio. It will, almost certainly, add a layer of protection against black swan events which become more likely in a destabilized geo-political landscape. I think it is a critical addition in today’s world.
Tom Reavis
President
Worldwide Capital Strategies
The content of this article is based upon the research and opinions of Tom Reavis.