Missiles and Hurricanes
Dear Clients & Friends,
The past few weeks have been unusually turbulent. North Korea has tested what is reportedly a hydrogen bomb and launched a missile over Japan; as a result, the U.S. is openly considering war. Hurricane Harvey has been the most damaging storm ever, devastating both Texas and Louisiana. And now we have Hurricane Irma, the most powerful Atlantic storm in history, approaching Florida. Given these events, there are certain questions that investors should be asking themselves. That is, should we be doing something different? If so, what? Indeed, these questions do require a response. What that response should be, however, depends on an analysis of what has actually changed in the economy and financial markets as a result of these events. So, to decide what we should be doing, let’s take a look at what those changes have been.
Has there been meaningful change?
Despite recent events, the situation with North Korea has been ongoing for decades—this is just the most recent phase. What has actually changed is not that major. A bigger bomb and somewhat better missiles do not put the U.S. at direct risk. In many ways, and regardless of media coverage, this is just a continuation of where we have been for some time.
As far as hurricanes Harvey and Irma, there certainly have been consequential effects on people’s lives. Bigger picture, though, major storms are a regular feature of American history (just think of Sandy and Katrina). Despite the damage they cause, they do not change the economy in a meaningful way. So as bad as Harvey was, and as bad as Irma may be, at the national level they should not result in significant changes.
And how did the markets—which respond to economic forces rather than human tragedy—react to the North Korean situation and the storms? Just as you might expect, they remained steady. In fact, U.S. markets remain close to their all-time highs, supported by strong economic and earnings growth.
What does the past tell us about the future?
To get an idea of whether the economy is likely to change going forward, we can look at the past to review how previous wars and storms have affected markets. Let’s start with wars.
A war with North Korea would be devastating for South Korea and Asia as a whole, but it would have limited effects here in the U.S. In the past, wars have typically resulted in initial declines in the markets. On average, however, markets were up just three months later. As for ongoing effects on the economy, war has typically boosted economic growth, largely due to increased government spending. We certainly can’t rule out a worse experience this time. But history suggests that, as investors, we have no need to panic just yet.
The same can be said for the effects of natural disasters. Of course, they will be devastating to local residents and economies—Houston will be years recovering from Harvey, as New Orleans was from Katrina. But at the national level, the effects are usually short lived, with an initial decrease in economic growth and employment due to the damage and disruption. This is usually followed by a recovery as the rebuilding process gets underway. In this case, the damage and the recovery period are likely to be longer than usual, with two of the worst storms in history hitting within days of each other. But the basic story should end up being the same. In fact, the recovery in Houston has already started as damage is assessed and repairs begun.
While every war and natural disaster is different, and tragic for those most directly affected, we as a country have gotten to be very good at picking up the pieces and moving on. Remember, the U.S. has actually been at war for more than a decade in Afghanistan, and the economy has continued to grow. Hurricanes Sandy and Katrina were devastating, but we moved on and recovered. As long as the base economy remains sound (which it is), the country and the financial markets remain well positioned to ride out the damage.
Should investors be worried?
I said at the start that recent events require a response, and they do. Please consider donating to the victims of the storms, and prepare yourself mentally for more worries from the North Korean situation. You should expect dramatic coverage of all this from the media. You should not, however, confuse emotional responses with what you should be doing with your investments.
Despite the very real problems created by the geopolitical situation and the hurricanes, the U.S. economy and financial markets remain in solid condition and appear likely to stay that way. There will be a time and a reason for worrying about our investments. But what we have right now does not meet those conditions. Let’s respond in a way that addresses the real problem, rather than being tricked into doing something we will later regret.
In summary, this is a message our team here at MORWM delivers regularly- as it pertains to one’s life savings, let us stay objective when faced with emotional events. Let us maintain discipline, and overcome fear with prudence. You all know that we move swiftly when necessary, but rarely allow our knees to jerk.
Have a wonderful week.
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
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The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. As stated above, commentary for the 5 risk factors provided by Brad McMillan and published in the Independent Market Observer. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. The S and P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.