Women, Wisdom & Wealth: Market response to Japan disaster


“Anyone can hold the helm when the sea is calm.”

Publilius Syrus, (~100 BC), Maxims

The events in Japan are heart-wrenching, and it’s likely that there will be more disturbing news as the true scope of this disaster unfolds. The economic impact on Japan’s economy and individual companies will be significant but there’s nothing to be gained by reacting hastily and emotionally.

Responding to human nature and instincts immediately following Japan’s earthquake, tsunami and nuclear disaster investors worldwide did rush away from risk based on massive uncertainty. This is how it looked in the days following the catastrophe; these numbers are based on closing market figures as of last Tuesday, due to newspaper deadlines. Tokyo’s NIKKEI Index ended the day Tuesday down 11 percent after dropping as much as 14 percent during the day. U.S. markets also declined, with the Dow Jones Industrial Average dropping 137.74 points, or -1.15 percent; the broader S&P 500 Index was down 14.52 points, or –1.12 percent; and the tech-heavy NASDAQ composite fell 33.64 points, or -1.25 percent. All three had been down much more before coming back to finish the day at these levels last Tuesday. For current information on these indexes and individual companies please contact our office.

The human toll in Japan is tragic and still unfolding. The Japanese economy is the third largest in the world behind the U.S. and China, and they were on relatively unsteady footing prior to this tragedy. The issue at hand is that we won’t know the full extent of the economic impact for quite some time. At this point it’s difficult to believe that Japan’s economy has dropped in value by 11 percent between March 14 and March 15.

Flight or fight

It’s human nature that investors will react to catastrophic events by seeking safe havens for their assets. This is why prices for U.S. Treasuries, European government bonds, Swiss francs and other traditional places of refuge rose after the earthquake and tsunami. This immediate response, while certainly understandable, is rarely the best long-term course of action for investors. This brings to mind the words of the American author Willa Cather, who wrote The Song of The Lark; “there are some things you learn best in calm, and some in storm.”

Price versus value

It’s important, particularly at times like this, to distinguish between price and value. The price of any given stock is what someone is willing to pay for it at the moment an investor wants to sell. Value on the other hand is a much different concept, it’s in the eye of the beholder, or shareholder as the case may be. The value of an investment to the investor is represented by his or her fractional ownership of the company issuing the stock. Simply stated, value is intended to reflect the long-term worth of a company, not the mood of the moment. Stock prices can swing widely in response to events but theoretically, over time, they follow the values of the companies they represent. These values very rarely change dramatically overnight, but in rare instances it may occur.

Home team

Meanwhile back on the home front, Federal Reserve Board Chairman Ben Bernanke told Congress that the central bank saw “increasing evidence that a self-sustaining recovery in consumer and business spending may be taking hold.” Fed officials also said that “the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand.” All of these are positive developments for the ongoing U.S. economic recovery.

Black gold

Japan’s reconstruction will be one of the most expensive in history. But Japan’s troubles aren’t the reason why we’re paying more for gasoline today. We’re paying more at the pump primarily because of what’s happening in the Middle East and fears of conflict spreading toward the Arabian Peninsula. Between the deadly civil unrest and protests in Libya, where oil supply has been disrupted, and Japan’s million and a half barrels a day of refining capacity completely shut down due to the devastating hurricane and tsunami, the two situations almost offset each other.

But the real danger is in the explosions at three nuclear reactors. Radioactive dust and smoke were somewhat contained, unlike the Chernobyl disaster of 1986, where fallout was sent spewing into the atmosphere. Public attitude on future reactors has since changed. “In the United States we have 104 nuclear reactors today, at least half of those will be shut down in the next 20 years,” says Raymond James Energy Analyst Pavel Molchanov.

While this is not the time for emotional responses it is neither the time for complacency. Understanding the difference between value and price along with understanding what you own and why you own it is the foundation for a sound investment program. Stay focused and invest accordingly.

*Investing involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results. Investors cannot invest directly in an index. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The performance mentioned does not include transaction costs which would reduce an investor’s return. Energy stocks generally involve greater risks.

This article provided by Darcie Guerin, financial advisor and branch manager of Raymond James & Associates, Inc. 606 Bald Eagle Dr. Suite 401, Marco Island, 34145. She may be reached at (239)389-1041, email Darcie.Guerin@RaymondJames.com or visit Website www.RaymondJames.com/Darcie.

© 2011 marconews.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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