Another day of fear and confusion emanating from Northeast Japan, the site of the overheating Tepco nuclear reactors, sent stock prices lower in Europe and the U.S. after a brief stabilization in Tokyo. Japan’s Nikkei 225 was up more than 5% Wednesday, recouping roughly one-quarter of the 19% lost over the prior four trading sessions. The Japanese market’s more optimistic turn did not translate to markets in Europe (where the STOXX Europe 600 Index was down 1.6%) or the U.S. (where the S&P 500 lost 1.9%), and one suspects that Tokyo won’t be pretty at the open on Thursday. Transcontinental rumors were flying during the day – including one from a European Union energy commissioner, who singlehandedly took the Dow down 100 points in less than ten minutes – from which the Dow rebounded briefly before settling to lower lows. (Guenther Oettinger’s “catastrophic” and “out of control” remarks were later toned down, but that seemed to do little for investor confidence.)
Prices for U.S. Treasury bonds and the Japanese yen rose sharply on the weakness in stocks. After markets closed in New York, the yen rallied to an all-time high of 77.5 to the dollar, busting through the 80 yen level that had marked the low for the dollar since 1995. The 10-year Treasury note rose more than three-quarters of a point in price today, putting its yield at a three-month low of 3.20%, down 55 basis points in the five weeks since its February high. Stock market volatility shot as high as 30 on the VIX scale, practically twice what it was at the January low. Gold finished Wednesday little changed at $1402 an ounce, while crude oil had a small gain but closed under $100 a barrel.
This morning’s housing starts and building permits report for February certainly didn’t provide any reason for optimism – but then we were not expecting much from this beleaguered sector. Single family housing starts fell 12% to 375,000 last month, within 4% of the January 2009 50-year low, while single family building permits were off 9% in February, a woeful leading indicator for future housing construction. If the U.S. economy is going to grow 3%-4% in 2011, it will have to do it without any significant help from housing. Consumer spending and business investment will do yeoman’s work for GDP this year, but falling stock prices of the sort seen in recent days don’t figure to support consumer or business confidence.
INVESTMENT OUTLOOK…The earthquake and tsunami in Japan, combined with Middle East unrest, have clouded the near-term prospects for equities. For the moment, corporate earnings prospects remain positive, which provides some offset to the perceived increased risk of either rising inflation or economic slowdown. P/E multiples, while relatively modest on a forward basis, may be vulnerable to downward pressures should worse come to worst in Libya or Japan. At this point, based on our still positive view on corporate profits, we would be inclined to view a moderate correction in stock prices as a buying opportunity should events in the Middle East start to go in a more benign direction and nuclear disaster be avoided in Japan. After the Monday-Wednesday drop, the S&P 500 is down 6.4% from last month’s 32-month stock market high and down 0.1% to date in 2011.
Copyright © 2011 by Wright Investors’ Service, Inc.