Japan nuclear crisis rocks Dow; uncertainty clouds stocks' future
After plunging at the opening Tuesday, the Dow Industrial Average regains some ground. But uncertainty over the Japan nuclear crisis could weigh on the economy, and markets, for some time.
After dropping sharply Tuesday morning, the stock market, by early afternoon, had regained some of its losses.
But, even with the slight improvement, the market remained lower as investors tried to figure out how the world economy would be affected by Japanâ€™s earthquake, tsunami, and stricken nuclear power plants.
At 1:30 p.m. the Dow Jones Industrial Average was off 198.90 points, after losing 296 on the open. The selling wave extended beyond stocks, dragging commodities such as oil and gold down as well.
If the stock market were to continue to fall, it could have larger ramifications for the US economy, which had only recently shown signs of a slightly more robust recovery. The buoyant stock market has helped companies raise capital. In addition, the marketâ€™s rebound over the past two years has helped raise consumer confidence, now at its highest level since the 2008 recession. That improved confidence has resulted in better auto and retail sales as investorsâ€™ portfolios have regained some luster.
â€śIf the decline is only a few days, it probably wonâ€™t have a significant impact on confidence,â€ť says Lynn Franco, an economist at the Conference Board business research organization in New York. â€śBut, if there are prolonged losses it could have a dampening effect and then it will be up to the job market to pickup the slack. Itâ€™s too soon to know.â€ť
What makes analyzing the Japan tragedy for investors difficult is the spotty information, says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. The nuclear issue, he says, goes â€śbeyond the boundaries of anyoneâ€™s thinking, there is not a good estimate of what it will evolve into.â€ť
For example, Bill Stone, chief investment strategist at PNC Financial Services Group in Philadelphia, expects Japan will rebuild and recover from the quake. But, he writes in an analysis Tuesday that his forecast assumes there will not be nuclear contamination in the region.
â€śSignificant contamination would make the region inhospitable to economic activity,â€ť he writes.
Although the area of Japan affected by the crisis at the nuclear power plants accounts for only about 6 percent of the nationâ€™s gross domestic product, it does have a lot of international connections as a supplier of auto parts and electronics.
â€śWith the just-in-time supply chain there could be some fall-out for some technology companies and auto producers,â€ť says Mr. Dickson. In addition, he notes the power outages may make it more difficult for large Japanese companies to plan production.
In an analysis issued on Tuesday, Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Mass., estimates that the initial impact on Japanâ€™s economy would be large but temporary. He compares the damage to the affects Hurricane Katrina had on the US in 2005 or the Kobe earthquake on Japan in 1995. Initially, he estimates, it could pare as much as a half of one percent off Japanâ€™s gross domestic product. However, he says, as the nation begins rebuilding, the effort will boost Japanâ€™s GDP by a similar amount next year.
But, if the nuclear emergency becomes a full-fledged catastrophe, IHS Global Insight says the negative effect on growth could be much worse.
The uncertainty is prompting Cumberland Investment Advisors, which manages $1.5 billion in assets, to sell its Japanese stock market investments.
â€śIt is a mistake to hold when there is an uncertain and developing negative risk,â€ť David Kotok, chief investment officer of the Vineland, N.J., money manager, writes in an online analysis Tuesday. â€śWe have that in Japan.â€ť
In Cumberlandâ€™s case, itâ€™s not just Japan. Mr. Kotok, in fact, has turned negative on stocks in general, now holding the largest amount of cash since the collapse of Lehman Brothers in 2008.
Kotok is far from alone in thinking the market will be challenged in the months ahead.
Dickson, the investment strategist, anticipates the marketâ€™s pullback could last for some time as investors sort through all the economic and geo-political ramifications.
â€śThere could be a three month period of consolidation, with some rallies and some pullbacks,â€ť he says. â€śWith all the uneasiness, I would not be surprised to see an 8 percent to 10 percent decline depending on what happens and continuing until the fallout becomes better known.â€ť