North Korea, trade tensions weigh on stocks

After a rebound in early May powered by strong corporate profits, stocks have suddenly stalled. The Dow is languishing below the psychologically important 25,000 level heading into what has historically been the worst six months of the year for equities. 

The main catalyst for the decline has to do with a new, and at the same time positively ancient, concern: geopolitics. 

Perhaps most worrisome for investors was President Trump’s move Thursday to abruptly cancel a planned summit with North Korea, before reopening the door today to a possible meeting in June. In the context of the trade fight between the U.S. and China, as well as with its NAFTA partners, and the U.S. exit from the Iran nuclear deal, this was seen as a reappearance of Mr. Trump’s “bad cop” instincts to shoot first and ask questions later. 

As for where things go from here, analysts with political risk consultancy Eurasia Group recommend keeping an eye on Trump’s Twitter feed for evidence of further deterioration in U.S.-China trade talks. China is widely thought to have influence on North Korea supremo Kim Jong Un. Worsening trade relations with China could signal that Beijing is unwilling to pressure Pyongyang regarding its nuclear program, as the U.S. has hoped it would.

As a result, stocks now face growing risks from both trade and foreign policy. 

Mr. Trump seems aware of the risks of linking trade issues with broader U.S. geopolitical strategy. At a rally in April, he said the market “could have been up 60 percent, but I have to do things” — like impose tariffs — since he “can’t let other countries take advantage of us.” 

A key question for investors: Is the president willing to sacrifice a buoyant stock market to achieve certain policy outcomes? If the answer is yes, caution may be warranted.

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