If it's September, we must be in a state of anxiety.
This is the cruellest month for stocks. Since 1950, the S&P 500, the world's most cited equity benchmark, has lost ground on average during September. And this year looks ripe to repeat the pattern.
You can choose your own misadventure: A potential apocalypse in North Korea? Yet another major hurricane in the continental United States? Growing political dysfunction in Washington? They each have the capacity to shake faith in this elderly bull market.
Share prices slid on Tuesday as investors toted up the concerns. In Toronto, the S&P/TSX Composite dropped 0.7 per cent, while in New York the S&P 500 lost 0.8 per cent. Gold, the traditional haven in times of stress, climbed to an 11-month high, while the yield on the 10-year U.S. Treasury, a key indicator of economic confidence, continued its decline.
Odds are that this cloud of negative omens will pass. Economic growth, especially in Canada and the United States, has been robust in recent months and none of today's problems, taken individually, is unprecedented. But investors appear to be pondering what might happen if the issues begin to feed on one another.
One way to look at the current situation is to view it as the collision between an unusually frothy stock market and an unusually erratic U.S. president.
Donald Trump, suffering from historically bad approval ratings, appears to have decided to go all out to satisfy his dwindling band of hard-line loyalists – which he did on Tuesday by ending an Obama-era program designed to shield young undocumented immigrants from deportation.
The potential for even more politically driven decision-making is frightening when put against the backdrop of North Korea. Mr. Trump has already threatened the country with "fire and fury" and his administration warned on Monday that the Asian country is "begging for war" with its recent tests of long-range missiles and bombs.
Outright fighting appears unlikely, simply because both sides have too much to lose. However, political tensions are likely to rise, as the United States seeks more international sanctions on North Korea.
Washington is pushing China, in particular, to cut off oil exports to its neighbour. Beijing has little motivation to comply since undermining the North Korea regime could eventually result in a unified Korea, backed by a U.S. military presence, on its doorstep. So, on Sunday, Mr. Trump threatened to stop U.S. trade with countries, including China, that do business with North Korea.
Playing a high-stakes game of chicken with China might play to Mr. Trump's political base, but it's jarring for an already jittery stock market. Measured against its past decade of earnings, the S&P 500 is about 70 per cent overvalued against historical norms, according to a recent report by ReSolve Asset Management of Toronto. Even if you adjust for a rising trend in valuations over the decades, the market is still nearly 40 per cent overvalued and, no, adjusting even further to account for today's rock-bottom interest rates doesn't substantially change the picture.
The lofty valuations make the U.S. market vulnerable to shocks, including natural disasters. Hurricane Harvey just devastated a swath of Texas and Louisiana; now Hurricane Irma, another major storm, is expected to threaten parts of the Caribbean and Florida in coming days.
Bad weather has combined with toxic politics and improving growth elsewhere to take the shine off the U.S. dollar. The greenback is usually a haven for investors during times of economic turmoil, but Capital Economics notes that it has actually weakened at times of tension with North Korea. Since the start of the year, investors have flocked to gold, not the U.S. dollar, as their security blanket of choice.
The growing fondness for gold may reflect increased doubts about Washington's ability to achieve coherent policies, especially when it comes to dealing with the world outside U.S. borders.
For instance, while the Trump administration has been taking a hard line on North Korea's arms race, it has also been sternly warning South Korea on trade issues. "To be threatening one of its key allies at the moment just seems wrong headed," noted Gareth Leather, senior Asia economist at Capital Economics.