August 11, 2017
The flare up in tensions between the United States and North Korea, over North Korea’s nuclear ambitions, roiled the financial markets this week. Conflict is an inherent element of the human condition, so geopolitical risks are always a concern for investors. We have highlighted in the past the potential spike in volatility that a geopolitical incident could cause. The increase in volatility can be especially pronounced when valuations are uncomfortably high. Indeed credit-oriented fixed income has been trading at historically tight spreads, and equities are at the top of recent trading ranges. The timing of geopolitical events and their long-term significance is highly unpredictable. Given the inherent uncertainty in geopolitical events, investors tend to over react and return correlations for higher risk assets tend to migrate upward. The speed with which this process happens is often surprisingly rapid, which is why we advocate well-diversified portfolios for risk control.
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