Even as stocks headed into their third day of losses, market observers were, if not sanguine, at least unalarmed by the threats lobbed by President Donald Trump and North Korean officials.
“Looking historically, there’s relatively little volatility when it comes to stock market and North Korean provocations,” said Kent Boydston, a research analyst at the Peterson Institute for International Economics. While the major U.S. indices were down as of midday Thursday, following overnight drops in the Asian and European markets, more granular metrics of risk assessment offered a more nuanced picture.
The VIX, or volatility index widely used as a proxy to gauge market fear, as well as the cost of insuring South Korean sovereign debt, remained well below crisis levels, Boydston pointed out. “I’m not an alarmist when it comes to this kind of thing,” he said.
Trump’s use of inflammatory language in person and on Twitter is unprecedented and potentially problematic from a diplomatic standpoint, but evidence of an economic impact is less clear cut.
“Trump — the rhetoric he uses is absolutely atypical for a U.S. president, so that could be a little bit of a wild card [but] it’s hard to find a tipping point where this next step is going to change everything,” Boydston said.
Wall Street is responding to the verbal bluster as just that, experts said. “The verbal jabs coming out of Pyongyang and D.C., I think, are more about negotiating than communicating action,” said Mitchell Goldberg, president of ClientFirst Strategy. “Everyone is posturing ahead of negotiations to have as strong a hand as possible.”
“I think a lot of people do believe this is just huffing and puffing — and when push comes to shove, there’s not going to be any pushing,” said Lawrence White, professor of economics at New York University’s Stern School of Business.
“Markets are always trying to anticipate, and to the extent that it has been building a while, markets have somewhat built in… whatever negative feelings they may have about the adversarial rhetoric that’s been going on,” White said.
“I think the market would put it as a very low probability that this turns into anything extremely meaningful,” said Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute.
Wren attributed this week’s downturn in the major indices to economic indicators rather than geopolitical brinkmanship. “There are a lot of reasons for the market to be tired right now… Valuations are stretched, the Fed’s in a rate hike cycle, gross margins are starting to be squeezed,” he said.
“The market was bound to go down eventually, and with the Dow in the low 20,000s, this is not a big retreat to worry about,” Goldberg said.
“There’s a silver lining,” he added. If Congress fails to meet Wall Street’s expectations upon its return from summer recess, that disappointment at least won’t send stocks crashing down from their peak. “We want stocks to ratchet down ahead of the budget negotiations,” Goldberg said.
To the extent that experts expressed trepidation, it was focused on what they characterized as a slim chance of an armed conflict. An actual military strike by North Korea on an American target would have economic as well as geopolitical repercussions, Boydston said.
“If they started launching missiles towards U.S. territory, Guam or Hawaii, I do think that would be a bigger and more direct provocation to the United States than we’ve seen before. I would say that would certainly be more of an escalation — that could potentially roil the markets a little bit more,” he told NBC News.
“If we saw any movement out of North Korea or if we saw any movements out of the United States… If there was evidence [Kim] is really mobilizing an attack or vice-versa, obviously that would be very negative. We could see a huge drop in the stock market — but we’d have to get to that point,” Cardillo said. “We could go down 3 to 4 percent in one day.”
And the prospect of the Kim regime escalating any display of military aggression into a regional conflict remains a remote but worrisome possibility, experts say.
“I don’t think there are too many people out there who think a North Korean missile could reach the U.S.,” Wren said. “The market’s not worried about that… but a regional conflict that would be accelerated due to North Korea doing something to one of its closer neighbors, that might be an issue.”
“The ultimate problem we have with North Korea is they do have nukes and Seoul is only 30 miles away from the DMZ,” Goldberg said. “That’s a frightening prospect.”