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Panic Attack No. 57: Stocks May 'Melt Up' if Nuclear War Avoided

Panic Attack No. 57: Stocks May 'Melt Up' if Nuclear War Avoided
William-Casey/Dreamstime

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Saturday, 19 August 2017 11:55 AM Current | Bio | Archive

It’s time to prepare for a hurricane. I’m talking about the weather, not the stock market. I’m still a stock market forecaster, not a weather forecaster. My backup career in case this one doesn’t work is movie reviewer. I rely on the National Oceanic and Atmospheric Administration (NOAA) in the US Commerce Department for long-term weather projections. In an 8/9 news release, the agency warned:

“Today NOAA issued the scheduled update for its 2017 hurricane season outlook. Forecasters are now predicting a higher likelihood of an above-normal season, and they increased the predicted number of named storms and major hurricanes. The season has the potential to be extremely active, and could be the most active since 2010.

“Forecasters now say there is a 60-percent chance of an above-normal season (compared to the May prediction of 45 percent chance), with 14-19 named storms (increased from the May predicted range of 11-17) and 2-5 major hurricanes (increased from the May predicted range of 2-4). A prediction for 5-9 hurricanes remains unchanged from the initial May outlook.”

So batten down the hatches! Stock investors may have started to do so last week in reaction to worsening tensions between the US and North Korea. The S&P 500 lost 1.4%, putting it 1.6% below the 2480.91 record high on August 7 (Fig. 1). That’s still a minor storm, and isn’t big enough to add to our list of corrections (when the S&P 500 is down 10%-20%), but we are adding it to our list of panic attacks since the start of the current bull market (Fig. 2). There have been 57 of them now including the latest one. (See our S&P 500 Panic Attacks Since 2009.) They’ve all been selloffs triggered by frightening events that turned out to be false alarms, and were followed by relief rallies to new cyclical highs and then new record highs since March 28, 2013.

I suspect that the latest panic attack could last a while longer, but will probably set the stage for a powerful relief rally, perhaps even a melt-up. The relief should be that the latest panic attack didn’t cause a (nuclear) meltdown. Last week’s selloff occurred mostly during Thursday after President Donald Trump, on Tuesday, threatened to hit North Korea with “fire and fury” if the country’s regime doesn’t cease and desist with their nuclear arms program and their war-mongering. Consider the following:

(1) VIX. The S&P 500 VIX woke up from its summertime siesta, rising from 9.93 on Monday to 16.04 on Thursday (Fig. 3). Admittedly, that’s not much of a panic reaction for the S&P 500, especially since the South Korea MSCI stock price index (in local currency) dropped 3.5% last week, though it is still up 21.3% y/y (Fig. 4).

(2) The worst month. It’s still early in the stock market’s often-stormy fall season. A week ago Friday in Barron’s, Randy Forsyth noted, “Since 1950, however, August has been the worst month for the Dow Jones Industrial Average, according to the Stock Trader’s Almanac edited by Jeffrey A. Hirsch. And, in a note written along with Christopher Mistal, Augusts in years after presidential elections have been especially treacherous.” Our data for the S&P 500 since 1928 show that September has been the worst month for this index (Fig. 5).

(3) Unlucky 7. In his column this week, Randy relates, “And, for reasons possibly mystical, years ending in 7 have been particularly treacherous during this period. In Leuthold’s Green Book (as the firm’s widely read monthly publication for clients is popularly called), Ramsey reproduces charts of stock prices for years ending in 7, going all the way back to 1887, and darned if they all don’t have some sort of swoon around this time of year.”

As an amateur numerologist, I’m surprised since seven is considered to be a lucky number. In addition, there are seven seas, seven continents, seven colors in a rainbow, seven notes on a musical scale, seven days in a week, and the Seven Wonders of the World. In the movies, the good guys were the protagonists in “The Seven Samurai” and “The Magnificent Seven.”

(4) Bay of a Pig. My current worst-case scenario for the North Korean Missile Crisis is that it will be like the Cuban Missile Crisis. I doubt that Lil’ Kim will back down during the current one as did Nikita Khrushchev during the previous one. More likely is that the US will shoot down Kim’s next test missile launch and once again threaten “fire and fury” on all of North Korea if Kim retaliates with an artillery barrage against South Korea. In this Wrath of Don scenario, the US might launch surgical strikes against North Korea’s military installations. Before that happens, China is likely to get sufficiently alarmed to depose Kim in exchange for US assurances that North Korea will remain a Chinese protectorate forever, if China de-nukes the country.

This scenario could trigger a major panic attack in the stock market followed by an extraordinary relief rally. It could also be seen as a HUGE win for not only President Trump but also President Xi. In other words, a win-win scenario is possible and could easily trigger a melt-up, assuming that a meltdown is averted.

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EdwardYardeni
There have been 57 panic attacks by investors about the stock market. I suspect that the latest panic attack could last a while longer, but will probably set the stage for a powerful relief rally, perhaps even a melt-up.
panic, attack, stock, market, investors, nuclear, war
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Saturday, 19 August 2017 11:55 AM
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