Financial Markets Alert – March 16, 2011
Sendai Earthquake and Tsunami
Financial Market Impact
Dow Jones Industrial Average – 242 (-2.04%)
Standard and Poor’s 500 Index -24.99 (-1.95%)
NASDAQ -50.51 (-1.89%)
A 9.0 magnitude earthquake struck off the coast of the Oshika Peninsula in Japan on Friday, March 11. Immediately following the earthquake, a tsunami slammed the Japanese coast with waves as high as thirty-three feet. The loss of life and property in Japan has been significant. Major damage has occurred to several of Japan’s nuclear power plants. Three Japanese nuclear reactors have suffered hydrogen buildup explosions and their stabilization remains uncertain.
Understandably, the immense human tragedy and fears surrounding the eventual outcome of the nuclear facilities have led to increased volatility in global financial markets. The Nikkei-225 Stock Index has lost over -11% since March 11 and the U.S. based Dow Jones Industrial average has lost -3.57% (Bloomberg LLP).
Market Decline Factors
- Highly emotional event. The uncertainty surrounding a nuclear accident can generate extreme fear. This leads to a “sell now and ask questions later” approach to investing. Fear overrides fundamentals.
- The Dow Jones Industrial Average is up 21.82% since mid-2010. Investors are using the event to justify realizing capital gains.
- Negative global events that exist for more than a single day can allow panic to replace rational investing decisions.
Long-Term Market Effect
- The historic drivers of stock price appreciation remain unchanged (below average price-to-earnings ratios, domestic job creation, low interest rates, and growing corporate earnings).
- Historic analysis of similar events reveals a return to pre disaster market levels within a short period of time.
- The tragedy is limited geographically. Japan exposure remains very small in our portfolios (less than 1%).
- The U.S. recovery remains on track and largely unaffected.
Our Approach
- Continue to monitor events related to the Japanese nuclear reactors and incorporate developing information into the analysis and portfolio construction.
- Look to execute purchases into U.S. stock positions at lower prices.
- Identify emerging opportunities for potential new investments. Continue exploring alternative energy investments such as solar and wind power that offer substitute approaches to nuclear power generation.
