Markets in a Nutshell
March 21, 2011
Stocks pulled back last week. The Dow lost 1.5% but is still up 2.4% for the year. From its recent high of 12,391 on Feb. 18th, the Dow lost 6.2% to last Wed. low of 11,613. The S&P 500 dropped 1.9% and is up 1.7% while the Nasdaq fell 2.6% and is down 0.3% for 2011. Bonds rallied again last week and are up 0.98% for the year (the Barclays Aggregate Bond index). Gold dropped $5.6 an ounce last week but is still above $1,400 an ounce at $1,415. Oil rose back over $100 a barrel (boo for higher gasoline prices!) and is up 10.6% for the year. Foreign stocks (MSCI EAFE) have dropped 1% so far in 2011.
From its recent high of 12,391 on Feb. 18th, the Dow lost 6.2% to last Wed. low of 11,613 (the S&P is off 6.5% high to low). So is that enough of the long awaited correction in stocks? Long time money manager Lazlo Birinyi (Bloomberg News 3/17/11) sees the correction continuing until the end of the month before a resumption of a bull market in stocks that will take the S&P 500 to 1,333 by end of 2011 (a gain of 6% for the year) and 2,854 by 2014 (a gain of 123% from current levels). Birinyi’s 2011 forecast is modest (which his firm admits) compared to the average market analyst which sees an 11% gain for 2011.
The Japan disaster was obviously at the forefront influencing investment markets last week (although the Middle East turmoil still is a daily consideration). So naturally there are varying opinions on what will happen next for Japan. As Jason Zweig reports in the Wall Street Journal (3/19-20), investors are “betting” on a Japanese recovery as $1.2 billion flowed into Japanese exchange traded stock funds last week. From a purely investment standpoint, Japanese stocks are inexpensive relative to the rest of the world, selling at “book value” while other countries sell at 2 times book value. Oakmark International manager David Herro notes that the Japanese market valuations have come down from 60 times earnings (a 60 p/e ratio) to the current levels of 16. Read on…
While the above can be compelling reasons to invest in Japan, investors also should be aware of the downsides. Economist John Mauldin has referred to (before the earthquake) the Japanese economy as a “bug in search of a windshield” and cites the enormous debt levels (Japan has over a 200% debt to GDP ratio which is the highest by far of any country in the developed world) as reason why investors should be wary of the prospects in Japan over the next decade. Our take would be that while declines in the Japanese stock market, especially those driven by panic, open opportunities investing in good Japanese companies (such as Toyota, Canon, Nintendo—see Barron’s article 3/21/11), Japan is like the rest of the developed world in that it will have to deal with high debt levels at some point which will have a drag on stock prices in general.