Worry has taken over world stock markets (Photo: Reuters)
The US stock market, it appears, won’t dodge the Japanese earthquake. Up until Tuesday, US investors had mostly shrugged off the horrific events in Asia. And now, it seems, no stock is safe. Not even the cute Aflac duck. Shares of Aflac stock were down 10%
Shares of US companies plunged on Tuesday morning, with the Dow Jones industrial average falling as much as 300 points. By the middle of the day, the market had recovered some of its losses and the Dow was down around 200 points. Some of the worse hit stocks were insurers, including Aflac, and Hartford Financial Services, which fell 8%. Shares of General Electric, which made a number of the nuclear power reactors now in trouble in Japan, were also down nearly 5%. And that makes sense. There have already been estimates that the quake could cost insurers as much as $35 billion. The outlook for new nuclear reactors is surely dimming. But even companies just tangentially affected by the earthquake were down big as well. Intel, the chip maker, for instance, was down nearly 3.5% on Monday. Apple was off over 2%. Office supply retail chain Staples: It’s stock lost more than a 1%.
So what happened? Investors have shifted from caring about actual economic data to fearing the worst. And that is a dangerous situation for the market. The good news is that in the past with non-economic disasters, particularly nuclear ones, the stock market has rebounded just as quickly as it has collapsed. And that will probably be the case this time, too. Here’s why:
In the past, earthquakes, despite their size, have done little damage to stock markets. Why is that? Markets hate uncertainty. Earthquakes, though, once they happen are generally certain events. They have a definite beginning and end. Yes, there are fears of lingering health problems, but generally within a day, the bulk of the damage has been done. And that’s what most people expected to happen in Japan.
That outlook, of course, changed overnight with the escalating nuclear meltdown. The spreading nuclear leak has changed the earthquake from a one day event to a continuing and growing disaster. Where it will end all of a sudden isn’t clear. Worse case scenarios, even unlikely ones like the evacuation of Tokyo or nuclear contamination on the US West Coast, are now in play. And that has added the element of uncertainty that is now rocking the market.
But before you get swept up in the panic selling here’s what you need to know: First, what should really matter to the US market, the impact of a Japanese slowdown on the US economy, really hasn’t changed. US economic growth has very little to do with the health of the Japanese economy. Remember, we had the huge tech boom of the 1990s just as Japan was having its lost decade. More recently, the US has pulled out of recession as Japan’s economy has continued to shrink. China and other emerging markets have become a much bigger factor for the US.
Second, when it comes to non-economic disasters, natural or unnatural, the stock market tends to regain most of its losses within six months. Consider 9/11. The Standard & Poors 500 stock index fell 5.5% in the week after the Twin Towers fell. But six months later stocks had more than rebounded and were 6.6% higher than where the stood before the US terrorist attack.
The market seems to have snapped back even quicker when it comes to fears about nuclear reactor meltdowns. Following Chernobyl, the market took 14 days to reach a low (down 4.25%). But it took just six days after that for the market to regain all of its losses. Stock market research firm Birinyi Associates took a look at 15 non-economic disasters that have occurred over the past 60 years and found that on average six months after the event, the stock market had fallen slightly less than 1%.
That doesn’t mean things won’t be worse this time around. Past nuclear reactor meltdowns have been relatively contained. And indeed, the earthquake could cause a debt crisis for the Japanese government, which could hurt US banks, many of which invest in Japanese bonds. But whatever happens, it seems that Mr. Market is following his usual pattern. Worry about worst case scenarios first, and deal with reality later. It’s hard to know how long or how far the first stage will take us this time around. But what you can be sure of is that the return to reality will bring a stock market rebound with it.