9/15/17 – Teflon Market Closes at New Highs

Stocks Power Through Geopolitical Risk

In spite of North Korea launching another missile over Japan, stock markets rallied this week to close at all-time highs. The market seems to resemble teflon in that nothing negative sticks to it. Investors seems comfortable that new sanctions and diplomacy will diffuse the situation. This is almost the inverse of what we saw five years ago when markets sold-off on every bit of bad news out of Greece. Today, markets shake-off most negative news. On the week the Dow gained 2.2% while the S&P 500 gained 1.6%. Both indices closed the week at all-time highs.

Historically, September is the worst month for the stock market. It’s the only month with a negative average return. So far this month though, markets have been very strong, including this week, which posted the best weekly gain all year. Why is the market shrugging off potential concerns? The North Korea situation seems like a legitimate risk to me. North Korean leader Kim Jong Un seems borderline crazy and continues to provoke the international community. It’s hard to figure what Kim’s ultimate objective is, but given the proximity to South Korea and Japan, the potential for a major economic event exists. Since the financial crisis, markets have grown to believe that central bank liquidity can solve any problem. I agree with that idea on a sovereign debt crises, but North Korea seems like a risk that isn’t being priced into stocks at the moment.

Oil increased sharply this week, gaining 4.9% to close at $49.87/barrel. Oil hasn’t closed a week above $50 since May. The yield on the 10-yr Treasury moved sharply higher, up to 2.20% from 2.05% last week. The average rate on a 30-yr fixed remained constant at 3.78%. Given the sharp increase in Treasury rates, mortgage rates will likely follow next week.

Close Weekly YTD
Dow Jones 22,268.34 2.2% 12.7%
S&P 500 2,500.23 1.6% 11.7%
Oil 49.87 4.9% (7.5%)
10-yr Treasury (∆ in bps) 2.20 15 (24)

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