North Korea Spooks Wall Street; Could Trigger Stock Market Crash
The tension in the markets remains high. Stock market crash predictions are increasing. The latest source of concern is North Korea. As the President of the United States, Donald Trump, engages in verbal duels with his counterpart in Pyongyang, Kim Jong Un, the fate of the world hangs on their ability to avoid acting on the risks their dangerous game of chicken has fueled.
North Korea has made threats to wipe out the United States before. Twenty years ago, then-leader Kim Jong Il made similar threats. But, since then, North Korea has launched several test missiles, which suggest it has the capability to deliver a warhead to a target of great interest to the United States. This could be Japan, South Korea, or a U.S. territory like Guam. Investors, therefore, are advised to take cover ahead of the greater chance of an upcoming stock market crash.
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Not since the Cold War between the USSR and the USA has the threat of a nuclear confrontation been so strong. Yet, the USSR and the USA never exchanged the kind of verbal vitriol display that Trump and Kim have shown recently. Nobody should discount the possibility of North Korea having a nuclear warhead. It casts a shadow on the future of the world, let alone future stock market crash predictions!
The sharp rise in political and military tensions cannot help but affect the markets. Markets move on sentiment. Thus, the mere hint of a nuclear confrontation is sure to act as a major downer. It’s not necessarily the dark mood that influences the negative Wall Street predictions. There’s no doubt, in fact, that the North Korean crisis will put a negative spin on the stock market forecast for the next three months at least.
A Market Crash Could Happen in the Next Three Months
Why three months? The verbal dispute will reach a peak around the time Kim Jong Un has stated that North Korea would attack a U.S. military base in Guam on August 15. The U.S. believes the country has a possible miniature nuclear warhead, which when deployed by Pyongyang’s Hwasong or Musidan rockets, could theoretically hit Guam. Will Kim Jong Un actually fire that missile, with or without the warhead? No. But, that’s not because he doesn’t have the capability. Rather, the Korean leader and his strategists want to raised tensions and keep the Americans guessing whether or not North Korea actually has said capability.
The guessing game can generate damage all by itself. American investors—other than perhaps defense stocks—will lose confidence. The markets could collapse and the economy would suffer in a domino effect. North Korea has already won the first stage of this cold war. It has exposed the fallibility of U.S. intelligence services.
They can’t tell if Pyongyang has, or doesn’t have, a nuclear weapon. That means the White House is prone to mistakes. In such a climate, Trump’s generals will advise caution, prolonging the verbal exchange rather than risk reaching a nuclear charged point of no return. By the time world diplomacy understands what’s going on and what North Korea wants—assurances that the U.S. won’t pursue regime change and a resumption of talks to end sanctions—at least three months will have passed.
The price of gold, even more than market volatility, as measure by the CBOE VIX index, offers some perspective. As ever, gold is a barometer of risk and overall tensions. Against the backdrop of North Korean tensions, the price of gold has risen to $1,291 per ounce. That’s the highest in at least two months. As for the VIX index, it too has hit the highest rates in months. Certainly, the highest since Donald Trump’s election, after a major daily jump:
Chart courtesy of StockCharts.com
The best that investors and analysts can expect now is that a market collapse can’t be averted if something like a really serious conflict occurs. The fact is, we don’t know; only North Korea knows. Nobody, least of all Trump, can take a risk. If he’s wrong—that is, if North Korea has no nuclear weapons, and there’s a 50/50 chance of that—he’s gambling his credibility and presidency. If he’s right, then we are all screwed and the markets will be the least of our concerns.
Nobody can invest in the markets now without worrying about the risk. The best course of action now is caution. Thus, expect fears to encourage investors to liquidate some positions, even in the light of the strong gains with the upsets recorded in the markets so far.
