From a market perspective, will Japan and Katrina be different?

Meeting3/17/11:  In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

Despite further losses in Japanese markets last night of between one and two percent, the S&P opened solidly higher this morning  Herculean efforts to contain reactor leaks continue while world financial leaders hold talks today to discuss ways to calm global markets.  Meanwhile, the yen hovered near record highs against the dollar on speculation of repatriation of dollars into yen to fund reconstruction efforts.  U.S. stocks took cues from European markets, which registered solid gains in the first half of their trading session.  Europe benefited from strength in mining stocks and solid demand at a Spanish bond auction, while non-Japan Asia was mixed.  Crude jumped about $2 as tensions in Saudi Arabia and Bahrain escalated, while agriculture and base metals rebounded strongly from earlier in the week.

Looking back at Wednesday, fear and uncertainty were the predominant investor emotions as stocks fell about 2% in the U.S.  The session was a perfect example of how a comment can move jittery markets in this type of environment.  The comment came from the European Union Energy Minister just before 11 AM EST as he stated that the nuclear situation in Japan was “out of control.”  The comment, carried on newswires immediately, sent the S&P 500 down 1.5% in a matter of minutes after it had been mostly unchanged for much of the morning.  Within 15 minutes, clarification that he was reiterating comments that he had made the night before and had no new information allowed the market to quickly recoup much of the losses.  However, once market participants saw how fragile confidence was, stocks sold off sharply again to end the day with steep losses.  All 10 S&P sectors fell by more than 1% on the day, led lower by the Technology sector.  Defensives held up better than cyclicals while supply chain disruptions and analyst downgrades weighed on Technology.  Small and mid-cap stocks held up better than large caps due in part to more limited exposure to Japan.  West Texas Intermediate Crude rose on clashes in Bahrain, while Japan’s need to repower and rebuild its economy boosted copper, natural gas and shares of coal producers.  The S&P 500 is down over 6% from last month’s highs, virtually wiping out 2011 gains.

Around our financial planning firm, we were discussing three items this morning that we thought would be of particular interest to our readers:

Financially speaking, how are Japan and Katrina different?  In a word, scope.  The key difference with the earthquake in Japan and its aftermath is that an entire country, which is the world’s third largest economy, is being impacted.  In other such instances (9/11, Katrina, London terror attacks, etc.) only a portion of a city or country was impacted.  Despite the devastation of Katrina, it did not drive “across the board” disruptions in the international supply chain like the Japanese earthquake is doing.

Food and energy inflation is still surging, but core inflation is tame.  Both overall and core consumer prices exceeded expectations in February.  Boosted by a 3.4% month-over-month gain in energy prices and a 0.6% month-over-month gain in food prices, the CPI rose 0.5% month-over-month in February, exceeding expectations of a 0.4% month-over-month gain.  Overall consumer prices are up 2.1% from a year ago.  Over the past 30 years, consumer price inflation has averaged around 3.2%.  Groceries and gasoline together account for about 13% of consumer spending, and therefore have a 13% weight in CPI.  However, since most Americans visit the grocery store or the gas station at least a few times a week, rising food and energy prices are in the headlines.  Outside of food and energy, consumer prices remain tame, and are up just 1.1% from a year ago.  The FOMC said this about inflation in its recent statement, “Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”

Moody’s retained its negative outlook on state and local municipal bonds for the third consecutive year.  While the rating agency noted the challenges of balancing budgets, it did not expect any states to default and forecasts a modest increase in local defaults.  Moody’s highlighted the ability of municipalities to raise taxes, cut spending and put off new debt issuance, enabling them to avoid default.

 As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA

President/CEO

Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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