Trading Risk: Stocks During the North Korea Summit

For the past several weeks, a proposed summit between President Trump and North Korean leader Kim Jong Un has been whimsically planned, cancelled, and re-planned. They continue trading PR students. Most recent developments suggest that the summit is confirmed. It will allegedly go ahead as planned on June 12.

The North Korea summit saga, like other recent political issues such as tariff disputes, has a seemingly unclear outcome. Time will tell what impact the summit actually has on the global economy. But short-term developments can still have large effects on day-to-day market activity.

Trump’s Trading Politics

Trump’s politics tend to be polarizing. He impulsively plans a political summit, only to cancel it. Then he imposes tariffs on trade partners while announcing improved trade relations. All of this volatility can be tricky when trying to focus on your investments.

Helpful Tips: Trading Risk

The North Korea summit issue is a perfect lens through which we can analyze how investors flee or flock to more risky assets in the face of political uncertainty. An investor’s risk profile can take many forms, but we’ll keep it simple for now and imagine there are just two types of investors: risk-seeking and risk-averse.

A risk-seeking investor takes on risk by investing in riskier assets with presumably higher potential for returns. Risk-averse trading puts your money in safer assets that carry lower potential for return.

The quick-changing trajectory of the summit and impact that its outcome has, forces investors to reassess their risk profiles.

So What Could Happen?

There are two likely outcomes. The summit proceeds successfully. Then relations are improved. Or it proceeds unsuccessfully and relations sour.

When relations are good, more people practice risk-seeking trading and invest in riskier assets. When relations are bad, people fear conflict and the negative economic impacts associated with it. They tend to be more risk-averse and invest in safer assets. Simple.

Historically, an increase in political tension is positively correlated with risk-averse investing behavior. Trump’s practice of “policy by tweet” has made these movements much more difficult for investors to see coming. Trump’s interaction with Wall Street is atypical when compared to that of other US presidents.

Trading New Volatility

His constant directional changes in policies and statements have introduced a significant amount of unnecessary volatility into financial markets. Trump’s revolutionary usage of Twitter to announce far-reaching policy decisions has created a more unilateral White House and an increasingly reactive Capitol Hill.

But how exactly will this affect my investments? Let’s take a closer look as we strive towards achieving financial fluency.

What’s This Mean for my Portfolio?

So, how can you use all of this political turbulence to your advantage? Stay informed and decide what level of risk you are comfortable with incurring. If you think the North Korea summit will happen, consider investing in risky assets like tech ( IYW) and emerging markets (specifically Asia, in this case). If you think the North Korea summit will fall through yet again, consider putting your money in safer assets like gold ( JNUG).

You can apply this methodology to many other major issues that deeply impact individual markets and the global economy as a whole. Scandals, trade wars, and nuclear threats all force investors to flee to safer havens, while calmed political negotiations and technological achievements draw those same investors to riskier assets.

Investors around the world will be watching the US-North Korea summit closely — so should you. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.

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Originally published at https://blog.rapunzlinvestments.com on June 8, 2018.