8/11/17 – Geopolitics Drives Markets Lower

Volatility is Back on Geopolitical News

Stocks declined this week, largely driven by concerns around the North Korea situation. President Trump appeared to draw a firm line in the sand about preemptively attacking North Korea only to have Kim Jong Un almost immediately cross that line by threatening to attack Guam. The situation seems to have diffused somewhat over the last two days, but this will be an important issue to follow. While North Korea has no impact on the global economy, any war could quickly cause massive damage in South Korea, Japan or even China, all of which would have a big impact on the global economy. Over the last week, I’ve been selling stocks to raise cash and provide some protection from this potential sell-off. The markets are near all-time highs and it seemed prudent to me to completely sell some positions and reduce some others. While I hope Kim Jong Un will recognize any military action is a losing proposition for him personally and will back down, I’m comfortable reducing risk in your portfolios given the uncertainty. For the week the Dow declined 1.1% while the S&P 500 dropped 1.4%.

Retail Earnings – Traditional brick and mortar retailers continue to feel the pain from Amazon’s increasingly large share of retail sales. Most of the major department stores reported earnings yesterday. Since then, Macy’s is down 10%, Kohl’s is down 8%, Dillard’s is down 21% and JC Penney’s is down a shocking 24%, in two days. JC Penney’s is now at an all-time low valuation, going back to the 1970s. Customer traffic keeps declining and while some earnings and sales weren’t that bad, the future expectations aren’t inspiring. Read More 

Stock Settlement – When you buy or sell a stock, the transaction doesn’t officially close, or settle, for three days. This is important when it comes to how quickly you can access money in an investment account. Cash is always available same day, but if stocks need to be sold, it takes three days to get access to the funds. Meaning, if a stock is sold on Monday, that money could not be transferred out until Thursday. This has been the market convention for years, but that’s changing this week. Stock settlement is being reduced to two days. I don’t understand why it can’t be one day, but it is still an improvement.

Oil declined again this week, dropping 1.4% to close at $48.76/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.19% from 2.27% a week ago. The average rate on a 30-yr fixed rate moved lower this week, to 3.90% from 3.93% last week.

Close Weekly YTD
Dow Jones 21,858.32 (1.1%) 10.6%
S&P 500 2,441.32 (1.4%) 9.0%
Oil 48.76 (1.4%) (9.5%)
10-yr Treasury (∆ in bps) 2.19 (7) (26)

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