Japan and the Markets
The news coming out of Japan has become pretty scary over the last few days and the global equity markets have reacted accordingly. As Japanese officials are trying to cope with the country’s worst destruction since World War II, investors are trying to sort what the impact of the world’s third largest economy will be globally. The initial reaction seems to be to sell first and figure it out later. It’s quite understandable that Japan’s near-term GDP is going to be severely affected by these events and the 11% drop in their markets yesterday is justifiable. What is far less certain is how this will affect their trading partners, energy demand, currency markets, commodities and the like.
Adding to the confusion, all of this news is on top of the ongoing chaos in the Middle East. Trying to digest all of this news and information in real-time is, to say the least, a bit overwhelming. Therefore, we think it’s important to step back and look at the bigger picture and not try to assess the impact of every piece of news coming out of Japan hour by hour.
The Big Picture
Near-term, there will certainly be supply chain and distribution interruptions. These will likely cause manufacturing headaches over the next month or two. Japanese domestic manufacturing will likely be slowed considerably throughout the country. This is not just due to the direct damage but also to their reduced power generating capacity. Longer-term, the rebuilding efforts will require massive amounts of materials and equipment. We’ll likely see higher commodity prices of specific goods when those efforts get underway in earnest. Lastly, the Bank of Japan has already promised that it will provide all the liquidity needed to soften the economic blow to Japan.
In addition to these foreseeable events, there will also be a number of significant energy policy discussions that will come out of all this. There’s no way to project the outcome, but surely we’ll hear a lot about alternative energy vs. conventional sources. There will be winners and losers in this debate. Those will be nuclear plant and equipment manufacturers, oil and gas producers and wind/solar firms.
My Portfolio
Beyond the human concerns, the next most obvious question is how this will impact our clients’ portfolios. Our best guess is very little. Last year’s stock market performance was driven by improved earnings and the Fed’s easy money policy. Those two forces are still very much in place. This is the reason we were optimistic about 2011’s potential and still are. There will undoubtedly be a good bit of volatility, both up and down, as the news out of Japan swings from bad to better. Our guess is that six months from now this volatility will have passed and the markets will be refocused on economic matters.
We think the more relevant economic news is what’s going on in the Middle East. Oil supply disruptions are of a far greater concern in our opinion. We hope that the Japanese crisis doesn’t take the international focus off the fighting in Libya. Oil prices above $100 per barrel are a more immediate threat to the economic recovery here and in Europe.
As always, we’ll continue to monitor the news and invest accordingly, but for now we don’t see a need to change our strategy. If anything, our goal of emphasizing portfolio cash flow over the last few years should help smooth the returns in times like this as well as directly meet our clients’ monthly income needs.
The news coming out of Japan has become pretty scary over the last few days and the global equity markets have reacted accordingly. As Japanese officials are trying to cope with the country’s worst destruction since World War II, investors are trying to sort what the impact of the world’s third largest economy will be globally. The initial reaction seems to be to sell first and figure it out later. It’s quite understandable that Japan’s near-term GDP is going to be severely affected by these events and the 11% drop in their markets yesterday is justifiable. What is far less certain is how this will affect their trading partners, energy demand, currency markets, commodities and the like.
Adding to the confusion, all of this news is on top of the ongoing chaos in the Middle East. Trying to digest all of this news and information in real-time is, to say the least, a bit overwhelming. Therefore, we think it’s important to step back and look at the bigger picture and not try to assess the impact of every piece of news coming out of Japan hour by hour.
The Big Picture
Near-term, there will certainly be supply chain and distribution interruptions. These will likely cause manufacturing headaches over the next month or two. Japanese domestic manufacturing will likely be slowed considerably throughout the country. This is not just due to the direct damage but also to their reduced power generating capacity. Longer-term, the rebuilding efforts will require massive amounts of materials and equipment. We’ll likely see higher commodity prices of specific goods when those efforts get underway in earnest. Lastly, the Bank of Japan has already promised that it will provide all the liquidity needed to soften the economic blow to Japan.
In addition to these foreseeable events, there will also be a number of significant energy policy discussions that will come out of all this. There’s no way to project the outcome, but surely we’ll hear a lot about alternative energy vs. conventional sources. There will be winners and losers in this debate. Those will be nuclear plant and equipment manufacturers, oil and gas producers and wind/solar firms.
My Portfolio
Beyond the human concerns, the next most obvious question is how this will impact our clients’ portfolios. Our best guess is very little. Last year’s stock market performance was driven by improved earnings and the Fed’s easy money policy. Those two forces are still very much in place. This is the reason we were optimistic about 2011’s potential and still are. There will undoubtedly be a good bit of volatility, both up and down, as the news out of Japan swings from bad to better. Our guess is that six months from now this volatility will have passed and the markets will be refocused on economic matters.
We think the more relevant economic news is what’s going on in the Middle East. Oil supply disruptions are of a far greater concern in our opinion. We hope that the Japanese crisis doesn’t take the international focus off the fighting in Libya. Oil prices above $100 per barrel are a more immediate threat to the economic recovery here and in Europe.
As always, we’ll continue to monitor the news and invest accordingly, but for now we don’t see a need to change our strategy. If anything, our goal of emphasizing portfolio cash flow over the last few years should help smooth the returns in times like this as well as directly meet our clients’ monthly income needs.
