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Japan nuclear crisis rocks Dow; uncertainty clouds stocks' future

After plunging at the opening Tuesday, the Dow Industrial Average regains some ground. But uncertainty over the Japan nuclear crisis could weigh on the economy, and markets, for some time.

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“Significant contamination would make the region inhospitable to economic activity,” he writes.

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Although the area of Japan affected by the crisis at the nuclear power plants accounts for only about 6 percent of the nation’s gross domestic product, it does have a lot of international connections as a supplier of auto parts and electronics.

“With the just-in-time supply chain there could be some fall-out for some technology companies and auto producers,” says Mr. Dickson. In addition, he notes the power outages may make it more difficult for large Japanese companies to plan production.

In an analysis issued on Tuesday, Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Mass., estimates that the initial impact on Japan’s economy would be large but temporary. He compares the damage to the affects Hurricane Katrina had on the US in 2005 or the Kobe earthquake on Japan in 1995. Initially, he estimates, it could pare as much as a half of one percent off Japan’s gross domestic product. However, he says, as the nation begins rebuilding, the effort will boost Japan’s GDP by a similar amount next year.

But, if the nuclear emergency becomes a full-fledged catastrophe, IHS Global Insight says the negative effect on growth could be much worse.

The uncertainty is prompting Cumberland Investment Advisors, which manages $1.5 billion in assets, to sell its Japanese stock market investments.

“It is a mistake to hold when there is an uncertain and developing negative risk,” David Kotok, chief investment officer of the Vineland, N.J., money manager, writes in an online analysis Tuesday. “We have that in Japan.”

In Cumberland’s case, it’s not just Japan. Mr. Kotok, in fact, has turned negative on stocks in general, now holding the largest amount of cash since the collapse of Lehman Brothers in 2008.

Kotok is far from alone in thinking the market will be challenged in the months ahead.

Dickson, the investment strategist, anticipates the market’s pullback could last for some time as investors sort through all the economic and geo-political ramifications.

“There could be a three month period of consolidation, with some rallies and some pullbacks,” he says. “With all the uneasiness, I would not be surprised to see an 8 percent to 10 percent decline depending on what happens and continuing until the fallout becomes better known.”

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