Fisher Investments Editorial Staff
Geopolitics, US Economy

Briefly Bellicose

By, 11/24/2010
 

Story Highlights:

  • North Korea shelled South Korea Tuesday—another in a long line of deliberate provocations from Pyongyang.
  • Military displays are the North's sole (and thus liberally used) bargaining chip.
  • Provided tensions don't escalate—unlikely, but not a question investors can readily answer—markets should quickly refocus on improving fundamentals.
  • A number of largely ignored economic reports Tuesday support continued long-term market growth, even as shorter-term events nip at the bull.

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North Korea
shelled the South Korean island, Yeonpyong, on Tuesday. Two South Korean military personnel died and 17 were injured. North Korean authorities blamed a South Korean naval exercise as due provocation for the attack. The shelling was the first direct artillery offensive since the Korean War—but only one in a long line of deliberate provocations from the North.

Geopolitical flare-ups on the Korean peninsula (or other hot spots) can set markets back briefly, but usually only briefly. North Korea is an authoritarian state with nuclear capabilities, as seemingly unpredictable as it is belligerent. But, though Pyongyang is undoubtedly confrontational, its actions tend to be repetitive. The North is far weaker than its southern counterpart in almost every way. Attacks and military displays are the North's sole (and thus liberally used) bargaining chip. 

Ratcheting up tension with (and no doubt domestic propaganda against) the South could be an attempt to strengthen support for the ruling dynasty as Kim Jong Il readies his son, Kim Jong Eun, to take the reins. Or perhaps the North is causing trouble so it can later back down in exchange for loosened economic sanctions or increased foreign aid. 

Whatever Kim's (mostly opaque) intentions, outright war isn't likely one of them. Successful brinksmanship is designed to send a message to the world without pushing things too far. Provocations in recent years include a number of long-range missile tests, two nuclear weapon tests, and the sinking of the South Korean naval ship Cheonan—actions that toed the line, but didn't cross it. Markets have rapidly regained lost ground on each occasion. Provided tensions don't escalate—unlikely, but not a question investors can readily answer—stocks should follow suit this time around too.

Outside Korea, Tuesday brought some very positive—but largely ignored—fundamental economic reports. Q3 US GDP was revised up more than expected (2.0% to 2.5% annualized). Part of the revision was due to strong consumer spending, which is back above pre-recession levels. US corporate profitability (according to the BEA) had its best quarter ever in Q3. Profits notched 28.2% y/y growth in the third quarter—after chalking successive 30%+ y/y growth in the prior three quarters for the first time since 1983. Even the beleaguered eurozone doesn't look so beleaguered. Preliminary eurozone November PMI beat expectations, indicating continued sturdy manufacturing and services expansion, and added to October, possible above trend economic growth to finish 2010. 

It's been a volatile week so far. But even as shorter-term events nip at the bull's hooves—a very common (and healthy) bull market phenomenon—improving fundamentals continue to surprise, supporting long-term market growth.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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