Geopolitical Events Test the Bull Market’s Resilience

The number of distractions competing for investors’ attention is particularly high at the moment. Despite this, the S&P 500 sits within shouting distance of its all-time high. The latest round of economic data has been generally solid and inflation has remained subdued. Whether this benign combination will persist in the coming weeks remains to be seen. In the meantime, the litany of potentially market moving events that could intrude on the prevailing end of summer reverie is formidable.

Tensions with North Korea are at the top of this list because the stakes are so high. How to diffuse this situation without resorting to a military confrontation is the objective. Whether diplomacy can succeed, however, is unclear. What to do to diffuse this threat has been a growing problem for the U.S. for some time. But now that North Korea’s nuclear capabilities have accelerated to a point where it can threaten the U.S. and its allies in the region, the issue is coming to a head.

Congress gets back to work this week and must immediately deal with the fiscal 2018 budget and the debt ceiling. Administration officials have sought to reassure markets that both issues will be addressed in a timely manner with no disruptions. But investors remain anxious. Based on the track record of Congress and its inability to get much done, such pronouncements are less than reassuring. Should either of these two issues result in disruption to the government, confidence in Washington will erode further, if that is possible.

Assuming all goes smoothly, Congress will presumably turn its attention to tax reform, which is what investors most want to see. With Congress in recess, the news flow surrounding details of the tax debate slowed to a trickle, except for a few trial balloons regarding possible alteration of the mortgage interest deduction. But that should soon change, assuming the government remains open and the Treasury continues to pay its bills.

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