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Over the past week, news and video from Japan has been everywhere. The tragedy is significant, not only in its immediate scope, but as one of the largest natural disasters of the past century.
Having said that, does it make you want to sell all of your stocks and go to cash?
Based on your viewing of CNN, you might think that seems like a rational strategy. You're wrong, but your brain can only take so much negative, disaster-driven news before you want to find a safe haven for your money.
Let's look at the actual market reaction. In January, 1995, after the Kobe earthquake, in which 7,000 people died and there was $100-billion (U.S.) in reconstruction spending, the Nikkei fell 8 per cent in 5 sessions, slumped 20 per cent peak-to-April trough, and took 10 months to recover losses. At the same time, Asian equity markets fell 6 per cent very quickly but immediately recovered, while the S&P500 and TSX were essentially unaffected.
So far, in the first five days after the earthquake, we have seen the Nikkei fall more than 20 per cent. Hong Kong markets have fallen 6 per cent over that period. U.S. markets have fallen 4.5 per cent to their lows on Tuesday. Canadian markets have fallen 4.3 per cent to their lows on Tuesday.
Today, Japan has less influence on the global economy than it did in 1995. At a glance, however, it appears that markets have reacted much stronger to the 2011 news than to the 1995 earthquake.
Of course every situation is different. The news of explosions at a nuclear plant, and potential contamination, has added risk and worry to the situation in Japan.
It remains to be seen if any of these declines will be long term or merely a small blip. For North American markets, I would suggest that with few exceptions, it will likely be a non-event for the market when we look back at it three months from now.
So that comes back to the question of whether CNN, CBC Newsworld, CTV News Channel, et al. add greater volatility to the markets? And does that, in turn, provide greater opportunity, in some cases, for investors who can ignore the news of the minute and take a long-term approach?
While we don't know the answer definitively, I would think that intuitively we do know. The markets in 2011 will overcompensate on the way down with this type of news. And for those who keep that in mind when investing, it can provide the comfort to hold on when it looks like the world is literally falling apart. Beyond that, there may be opportunities to take advantage of the downturns.
By the way - the last time the Nikkei was this low was in March, 2009, just after the absolute bottom of the global market crash. This might just be an investing opportunity, brought to you by 24-hour news.
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Ted Rechtshaffen