Although Japanese equities staged an impressive rally last night, U.S. stocks are moderately lower following further nuclear setbacks in that country and disappointing news on U.S. home construction.
- The S&P 500 index is about 5.5% off its Feb. 19 high, which may potentially make the sell-off an opportunity to put more risk in the portfolio if the major indices continue to trade lower.
- There should be improved economic growth due to the rebuilding in Japan, but it will not show up until Q3 or Q4 2011; infrastructure damage (especially to the power grid and transportation) must be stabilized first.
- The nuclear disaster has now far exceeded the damage at Three Mile Island, as a number of reactor cores may be in a state of partial meltdown. The uncertainty has caused investors to flee markets almost indiscriminately. Grains and metals have seen significant liquidation from "hot money" traders in the last two sessions.
- The need for capital may require Japan to liquidate some of the U.S. debt they are holding (currently about $1 trillion). This could potentially cause higher borrowing rates for the Treasury, although bonds are still well-bid due to the panicked nature of the markets.
The most rational plan in our view is to let the selling take its course, with the mindset of rebalancing toward more risk based on valuation shifts and other factors. I think the adjustment process is days, not weeks, away from implementation.
