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September 29 2017

Geopolitics, what is it good for? Absolutely nothin’!

In January, Robert Kahn of the Council on Foreign Relations wrote in Global Economics Monthly:

“Markets showed impressive resilience in the face of a range of geopolitical shocks in 2016, but recent market moves suggest this year could be different… It should be the year that global geopolitical risks provide the volatility in markets that I, and many other economists, have been predicting for some time.”

Kahn may share the bemusement of bond market prognosticators who have anticipated the end of the bull market in bonds for years and have yet to see their predictions prove out.

So far in 2017, investor confidence has remained impervious to geopolitical threats. Bloomberg reported, while diplomats at the United Nations stress over North Korea’s threat to drop a hydrogen bomb, Russia’s provocations along the borders of Eastern Europe, rising Middle East tensions, and conflict between the United States and China in the South China Sea, investors remain relatively sanguine.

The CBOE Volatility Index, or VIX, which measures market expectations for near-term volatility in the Standard & Poor’s 500 Index (S&P 500), finished below 10 on Friday. Historically, the VIX has finished below 10 on just a few days in its history. While the very low level of the VIX doesn’t tell us much about the future, Barron’s reports it indicates investors are not too concerned about “what’s happening now and what has happened.”

That contention appears to be supported by U.S. stock market performance. Despite hostile rhetoric between the United States and North Korea last week, the S&P 500 and Dow Jones Industrial Average both finished slightly higher.

Sources:
https://www.cfr.org/report/global-economics-monthly-january-2017
https://www.bloomberg.com/news/articles/2017-08-31/bond-market-s-biggest-rally-of-2017-amazes-traders-as-fed-looms
https://www.bloomberg.com/news/articles/2017-09-20/stress-at-un-not-shared-on-wall-street-as-stocks-set-records
http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/vix-historical-data
http://www.cboe.com/blogs/options-hub/2017/06/02/vix-index-closes-below-10-again-as-professor-called-vix-level-the-biggest-financial-mystery
http://www.barrons.com/articles/the-pros-and-cons-of-vix-the-markets-fear-gauge-1505942074
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html?mod=BOL_Nav_MAR_other

  • Data as of 9/22/20171-WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)0.0010.1180.1490.8790.1140.051
  • Dow Jones Global ex-U.S.0.419.415.724.7-0.6
  • 10-year Treasury Note (Yield Only)2.3NA1.62.61.74.6
  • Gold (per ounce)-2.111.7-3.32.2-65.9
  • Bloomberg Commodity Index-0.4-3-0.8-10.6-10.3-7.1
  • DJ Equity All REIT Total Return Index-2.55.40.59.89.65.9

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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