The Japanese market was already on its heels when the devastating earthquake and massive tsunami struck on March 11, 2011. And just as the country began to grasp the full extent of the disaster, the explosions in Sendai’s nuclear plants sent the Japanese stock market plunging. In just two days the Nikkei fell 16%. Wall Street followed loosely, with a drop of 1.7%.
A Historical Perspective
Markets are impossible to predict, but history may help guide our understanding. Our studies of crisis events have demonstrated that after a period of panic-induced weakness, stocks have generally recovered. For example, three months after the 2004 Indian Ocean earthquake and tsunami, the markets of the affected countries were mostly higher (see table below).
But this has not always been the case. After the 1995 Kobe earthquake in Japan, the market continued to sell off. Then, as now, the market had already been declining when disaster struck. In addition, Japan was in the midst of the same secular bear market that has continued to depress the market’s overall performance even to this day. In contrast, the other Tsunami-stricken Asian markets had been in secular bull markets.
What does this mean for these markets? It wouldn’t be surprising to see the Japanese market attempt to rally after the panic subsides. That prospect is also supported by the seasonal tendency for the market to rally before and after the fiscal New Year on April 1. But unless we see substantial and decisive “relative strength” improvement, we would view a rally with extreme caution. In our portfolio allocations, we remain underweight for Japan, while maintaining our slightly overweight allocations to the U.S. and normal allocations to Emerging Markets, and Asia Pacific countries (excluding Japan).
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on Wednesday, March 16th, 2011 at 12:37 am and is filed under Investing, Market Commentary.
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Special Update – The Impact of Natural Disasters on Foreign Equity Markets
The Japanese market was already on its heels when the devastating earthquake and massive tsunami struck on March 11, 2011. And just as the country began to grasp the full extent of the disaster, the explosions in Sendai’s nuclear plants sent the Japanese stock market plunging. In just two days the Nikkei fell 16%. Wall Street followed loosely, with a drop of 1.7%.
A Historical Perspective
Markets are impossible to predict, but history may help guide our understanding. Our studies of crisis events have demonstrated that after a period of panic-induced weakness, stocks have generally recovered. For example, three months after the 2004 Indian Ocean earthquake and tsunami, the markets of the affected countries were mostly higher (see table below).
But this has not always been the case. After the 1995 Kobe earthquake in Japan, the market continued to sell off. Then, as now, the market had already been declining when disaster struck. In addition, Japan was in the midst of the same secular bear market that has continued to depress the market’s overall performance even to this day. In contrast, the other Tsunami-stricken Asian markets had been in secular bull markets.
What does this mean for these markets? It wouldn’t be surprising to see the Japanese market attempt to rally after the panic subsides. That prospect is also supported by the seasonal tendency for the market to rally before and after the fiscal New Year on April 1. But unless we see substantial and decisive “relative strength” improvement, we would view a rally with extreme caution. In our portfolio allocations, we remain underweight for Japan, while maintaining our slightly overweight allocations to the U.S. and normal allocations to Emerging Markets, and Asia Pacific countries (excluding Japan).
This entry was posted on Wednesday, March 16th, 2011 at 12:37 am and is filed under Investing, Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.