THE CRISIS IN JAPAN & U.S. STOCKS

THE CRISIS IN JAPAN & U.S. STOCKS

By Floyd Miller

 

 

 

  Could this week’s selloff herald a correction?  Presented by Floyd E. Miller  Can our stock market ride out the turmoil? When U.S. stocks plunged in 2008-2009, analysts hoped overseas markets could “decouple” from the effects of America’s downturn. Now we wonder if our stock market can maintain its course with the impact of the crisis in Japan. This past week, that has proven to be difficult.  The scenario Wall Street fears. The nuclear risk in northern Japan becomes a Chernobyl-like disaster, prompting a sustained decline in global equities. The market turns bearish for weeks or months. The Dow experiences a correction . Our portfolios diminish in value, and consumer confidence retreats. Our economic recovery – seemingly assured if not established – is imperiled. {{more}}  Why that scenario may not happen. If risks diminish at Japan’s nuclear power plants, the effect on U.S. equities may end up being less severe. Japan’s economy is the third largest in the world, but that economy is export-driven. For the record – according to data from IHS Global Insight – Japan bought just 4.7% of our total exports last year with those exports representing 0.4% of our GDP.1  The Miyagi and Fukushima Prefectures account for about 6% of Japan’s GDP. Many economists see the nation’s 2011 GDP falling by roughly half a percentage point, assuming the radiation threat to Japan’s population moderates. Even if Japan’s GDP drops to zero this year, the impact on global growth would be small: an economist at Bank of America Merrill Lynch told the Wall Street Journal that global GDP would likely fall only about 0.1% as a consequence.1,2  It does not seem as if global demand will be greatly impacted by this crisis. What about supply? At present, roughly half of the “Japanese” autos we buy are manufactured in the U.S. or Canada. However, these plants get many of their parts from a variety of suppliers within Japan. Toyota may end up being the hardest-hit automaker: a spokesperson says it is losing about $72 million per day from the crisis.3  An economic slowdown in Japan could actually promote growth in other export-driven Asian economies, and it could also influence the world’s central banks and make them think twice about raising benchmark interest rates.  Stock markets try to hang on. Wednesday, European Union energy commissioner Gunther Oettinger characterized the situation at Fukushima as “out of control” and mentioned “talk of an apocalypse” in Japan; U.S. Secretary of Energy Steven Chu said the events “actually appear to be more serious than Three Mile Island.” The Dow was down nearly 300 points after those remarks, and lost 242.12 for the day. The NASDAQ and S&P 500 had lost YTD gains at the close Wednesday, though the catastrophe in Japan wasn’t the sole factor – poor data on housing starts and troubles in Bahrain affected things as well. The Nikkei 225 actually rebounded 5.68% Wednesday after a dramatic two-day plunge; Hong Kong’s Hang Seng gained 1.19% on the day’s session. The European markets mirrored the U.S. markets: England’s FTSE 100 slipped 1.70% and Germany’s DAX fell 2.01%, while the S&P 500 retreated 1.95%.4,5,6,7  Keep in mind, stocks can recover quickly & radically. Throughout history, stocks have rebounded after crises. The Nikkei 225 fell close to 25% after the 1995 Kobe earthquake, yet it actually gained back what it had lost and finished slightly positive on the year. The Dow plunged 684 points when U.S. markets reopened after 9/11 and lost 14.26% in a week, yet it was up 21.7% off its 2001 low by the end of the year.1,8,9  No equilibrium ahead – at least not for the short term. During the first quarter, some Wall Street analysts talked about a pullback on concerns that stocks were overvalued. We now have a pullback, but for reasons no one anticipated. Hopefully, efforts to restore electricity to the Fukushima Dai-ichi plant will soon be completed, which may restore a degree of calm to the world’s stock markets.  Floyd E. Miller may be reached at 325-676-0138 or fmiller@fscadvisor.com. www.floydmillerinvestments.com   This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.   Citations. 1 – online.wsj.com/article/SB10001424052748704662604576202793527739336.html [3/15/11] 2 – csmonitor.com/Business/2011/0315/Japan-nuclear-crisis-rocks-Dow-uncertainty-clouds-stocks-future [3/15/11]   3 – msnbc.msn.com/id/42087174/ns/business-autos/ [3/15/11] 4 – blogs.wsj.com/marketbeat/2011/03/16/markets-tumble-these-headlines-did-it/ [3/16/11] 5 – online.wsj.com/article/SB10001424052748703899704576204831523089092.html [3/16/11] 6 – cnbc.com/id/42115420 [3/16/11] 7 – money.cnn.com/data/world_markets/asia/ [3/16/11] 8 – time.com/time/specials/packages/article/0,28804,1845523_1845619_1845553,00.html [3/15/11] 9 – the-privateer.com/chart/dow-long.html [2/28/11]