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Why markets aren't overly concerned with the North Korea situation yet

  • Investment firm Columbia Threadneedle published a guide for investors wondering how to trade on global crisis headlines.
  • Asking three key questions can help investors gauge whether they need to actually react to a geopolitical headline.
  • Leuthold Group's Jim Paulsen believes the situation with North Korea has yet to reach the point where investors need to react.
People wave banners and shout slogans as they attend a rally in support of North Korea's stance against the US, on Kim Il-Sung square in Pyongyang on August 9, 2017.
Kim Won-Jin | AFP | Getty Images
People wave banners and shout slogans as they attend a rally in support of North Korea's stance against the US, on Kim Il-Sung square in Pyongyang on August 9, 2017.

Tension escalated between North Korea and the United States after President Donald Trump warned the rogue state is facing "fire and fury" and North Korea state media responded by saying the country is considering a missile strike against the U.S. Pacific territory of Guam.

Global and national stock markets, however, remain largely unperturbed.

While safe havens such as gold saw a bump, the CBOE Volatility Index is still down more than 16 percent this year, and the Dow and S&P 500 declined less than 0.5 percent in trading Wednesday.

"The whole idea of a nuclear attack seems so far-fetched or idiotic … that most [investors] are giving this a very low probability," Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC.

Paulsen says the current market moves are limited to "traders reacting to headlines," calling the situation an "extreme bluster from two leaders who have an abundance of bluster."

Yet as the crisis unfolds, how should investors respond?

The investment team at Columbia Threadneedle, which has around $467 billion in assets under management, on Aug. 3 published the firm's take on what investors should "do when headlines move markets." This post was popular on the Harvest Exchange research sharing website.

Avoiding an "emotional reaction" is crucial when deciding whether to actually move money in response to a geopolitical event, Columbia Threadneedle says, and investors should ask themselves the three following questions:

  1. "Is a superpower involved?"
  2. "Is there a risk to oil prices?"
  3. "Is there a risk to the global financial system?"

The tension with North Korea appears to require an affirmative answer to the firm's first question, as the isolated nation's threat of a missile attack on Guam would fulfill Columbia Threadneedle's criterion for the potential of a superpower being "quickly drawn into a situation." North Korea's saber rattling also could quickly escalate and "ignite involvement from several other countries," to other points the firm said investors must gauge.

For right now, the financial system and oil markets don't seem to be at risk.

Paulsen believes the situation is not yet there, but said financial markets will start to react "the longer this goes on intensifying without someone or something defusing it."

Columbia Threadneedle's post caveats that the bottom line is knowing when to "wait out what is most likely to be a short-term spike in headline-fueled volatility."

"With Trump in office, 'trash talk' is becoming commonplace, with little follow through, and he has found an equally big trash talker in North Korea," Paulsen added.