Geopolitical Tensions Weigh on the Market

The major market indices finished the week broadly lower with the S&P 500 posting its worst weekly decline since March.

August 14, 2017    |    By Mike Schwager

Performance for Week Ending 8/11/2017:

The Dow Jones Industrial Average (Dow) fell 1.06%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) finished down 1.63%, the Standard & Poor’s 500 Index (S&P 500) lost 1.43% and the Nasdaq Composite Index (NASDAQ) dipped by 1.50%. Sector performance was negative with 10 of the 11 S&P sector groups finishing lower. The Energy sector (-2.87%) was the worst performer while Consumer Staples (+0.07%) finished higher.

Index* Closing Price 8/11/2017 Percentage Change for Week Ending 8/11/2017 Year-to-Date Percentage Change Through 8/11/2017
Dow 21858.32 -1.06% +10.60%
Wilshire 5000 25291.14 -1.63% +7.96%
S&P 500 2441.32 -1.43% +9.04%
NASDAQ 6256.55 -1.50% +16.23%

*See below for Index Definitions

MARKET OBSERVATIONS: 8/7/2017 – 8/11/2017

The major market indices finished the week broadly lower with the S&P 500 posting its worst weekly decline since March. The poor performance was a result of rising geopolitical tensions between the United States and North Korea. Last Tuesday, President Trump told a group that any threat from North Korea would be met with “fire and fury like the world has never seen.” In response, North Korea announced plans to launch four rockets near Guam, saying preparations should be ready in a matter of days.

Despite this week’s pullback, the size of the market reaction should be kept in context. The S&P remains very close to record highs and in light of the potential seriousness of the situation, the decline was relatively muted with little sign of panic selling. This may suggest that investors do not expect the tensions to escalate to outright military action. We also have to remember that the North Korea threat is not necessarily ‘new news’ as the situation has been metastasizing since before Trump entered the Oval Office (recall during their post-election meetings at the White House President Obama warned Trump that NK would be his single largest geopolitical threat).

Markets were able to stabilize late in the week on signs inflationary pressure remains relatively muted. The Federal Reserve operates under a dual mandate of price stability and full employment. With the unemployment rate at 4.3%, the full employment mandate has been satisfied. Inflation (price stability), however, continues to fall short of the Fed’s 2% target. Last week, the Labor Department reported that the Consumer Price Index (CPI) during the month of July rose by a weaker than expected 0.1%. The “core” rate, which excludes food and energy, also rose 0.1%. On a year-over-year basis the headline CPI is up 1.7% while the “core” rate has also gained 1.7%.

The lackluster inflation numbers should keep the Fed on a very gradual pace forward. According to Bloomberg's World Interest Rate Probability data, the market is pricing in less than a 30% chance the Fed will raise its benchmark interest rate before the end of the year. In fact you have to go all the way out to the June 2018 Fed meeting before the odds exceed 50%. While these odds can change very quickly, they currently suggest that investors are betting that the interest rate environment should remain supportive of risk assets.

With market valuations at elevated levels and liquidity very tight due to seasonals, additional “saber rattling” from either the US or NK is likely to result in increased market volatility. Mid-August marks the belly of the summer doldrums when many Wall Street executives head off to the sandy shores of the Hamptons. At this time of year trading desks are typically manned by junior staffers with directions to “not lose money,” as such, Traders are likely to be quick on the trigger and sell on any hint of negative news. Low levels of liquidity also has a tendency to exaggerate market moves (both higher and lower) – stay tuned.

Q2 Earnings Season: Through Friday, over 90 percent of the S&P 500 have reported second quarter results with over 78 percent of the companies beating profit projections. Aggregate S&P 500 earnings are currently tracking at a 9.8% year-over-year pace. When all is said and done, analyst expected second quarter growth of 10.7%. If correct, it would mark the second consecutive quarter of double digit earnings growth.

Market View – Stay the Course: We believe the bull market remains intact. However elevated valuation levels, unfavorable seasonals during the late-Summer/early-Fall months and the recent uptick in geopolitical tensions raise the odds of a near term pullback. The “Goldilocks” environment (not too hot, not too cold as far as economic growth and inflation are concerned) should help limit the downside risk. From a macro point of view, the world is enjoying a period of synchronized global growth, which has resulted in a favorable turn in the earnings environment. In addition, valuation levels—while elevated—are far from extreme. If the market were to stage a pullback in the coming months, it would be viewed as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.

The Week Ahead: Earnings season will continue to wind down with just 20 members of the S&P 500 scheduled to release results throughout the week. Retailers will dominate the calendar with results out from bellwethers Home Depot, Wal-Mart, and Target. The data calendar will be relatively busy. Reports of interest include; July retail sales, the August Empire State Manufacturing Survey, the August housing market index, July housing starts and building permits, July industrial production, the August Philadelphia Fed Business Outlook Survey, and the University of Michigan’s preliminary August consumer sentiment survey. Also of note will be the release of the minutes from the July Federal Open Market Committee’s meeting on Wednesday. The Fed speaking calendar will be light with only two Federal Reserve officials scheduled to make public appearances: Dallas president Robert Kaplan will speak on both Thursday and Friday and Minneapolis president Neel Kashkari presents on Thursday.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

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