Libya and Japan dominate stock market returns in March
On February 18th David Edwards of our firm appeared on Bloomberg Radio's "The Hays Advantage" with Kathleen Hays. On that date, US stocks peaked at the highest levels of 2011, exactly doubling the 13 year low of March 9th, 2011. Edwards' lead off comment was that he thought "the stock market would fall 10% in the next 6 months, but he wouldn't change his strategy, because he anticipated a 20% rally on the other side." We live in an age of instant gratification, because US stocks fell 7.1% over the next 18 trading days. As of Friday's close, US stocks are down 4.8% from the high for the year, but are still up 2.1% for the year. Since specific news about corporations is light during March as companies enter the quiet period ahead of April earnings reports, investors are primarily reacting (and over-reacting) to civil war in Libya, which is disrupting the oil markets, and to the aftermath of the earthquake and tsunami in Japan.
The situation in Libya evolved out of an incident in Tunisia in December 17th during which a street vendor burned himself to death to protest police harassment of his livelihood of selling vegetables from a wheelbarrow. Somehow this act of suicide morphed into widespread civil disobedience that resulted in the overthrow of the Tunisian president within a month. Protest movements rapidly spread through the Arab world, with the president of Egypt as the next "domino" to fall, and the "leader of Libya" Muammar Gaddafi as the next likely victim. The Iranian government foments revolution through Shia proxies in Saudi Arabia, Bahrain, Lebanon and Yemen, while simultaneously suppressing a domestic revolution. Just as the fall of the Berlin Wall symbolized the "tipping point" beyond which the Soviet Union collapsed from its own internal contradictions, we may look back one day to that poor street vendor as the tipping point where 500 million people moved from the 19th century world to the 21st century world. But to predict that historic transition in December 2010 would be like predicting a hurricane from the flap of a butterfly's wings.
The situation in Japan is equally random. Of course it's well known that earthquakes and tsunamis occur often in that part of the world, but being able to forecast the timing of such geological events is decades in the future. The Japanese people build for earthquakes and drill for evacuating in the event of tsunamis. Compared to the 2004 tsunami in the Indian Ocean, which killed 200,000 people, mercifully the mortality from the Japanese quake will be in the 10,000 person range. We can extrapolate from the 1995 Kyoto quake, which killed 3,000 and cost $100 billion that this quake will cost $250-500 billion, which is not trivial. The 9/11 attacks in the United States killed 3,000 and cost $50 billion. Was there permanent damage to the global GDP as a result of either incident? No, because in a world of 6.5 billion people and $45 trillion in wealth (real estate plus stock markets) deaths in the thousands and costs in the billions are rounding errors in the world balance sheet.