With the recent tragedy in Japan, our thoughts and prayers go out to her people.  Obviously, the aftermath of such a tragic disaster not only brings immense personal suffering, but also ushers in a time of economic instability, uncertainly and concern.  In light of these events, we have received several calls and emails from clients regarding what impact the Japanese earthquakes would have on world markets, so we thought it would be timely to address the issue. 

Japan, like most countries in our post recession economy, has been struggling to regain its economic sea legs.  The recent natural disaster delivered a punch of historical proportions.  In our mind, the question becomes, “Will this disaster be a knockout blow or another setback before a painful recovery?”  We tend to believe it will be the latter, primarily because Japan is a nation of resilient, determined and efficient people.  We saw a similar situation in Japan after WWII, and following the 1995 Kobe earthquake.  In each circumstance, the people of Japan received it as an opportunity to rebuild, modernize and encourage growth of new economic activity.  We have no reason to believe this time will be any different.

As it applies to the US, the overall effects on our domestic economy should be somewhat limited.  U.S. exports to Japan are less than 5% of our total exports.  However, the issues in Japan will most likely cause supply disruptions for specific industries, such as auto and semiconductor.  In fact, GM has already started seeing the effects of this supply shortage and had to shut down production in several areas.  Thus, while it may not have an overwhelming effect on our economy, it does raise a red flag in several sectors for us to avoid. 

In the end, the issues in Japan are disconcerting, but on the investment side, we must keep our “eyes on the prize” and that prize is economic growth.  Our economy continues to improve, as evidenced by the recent round of corporate earnings and economic indicators such as manufacturing growth.  We have been communicating with you over the last several months that we were due for a correction as the markets were stretched.  We believe that such a corrective phase is now underway.  That said, our economy is continuing to improve and this should lead to higher markets later in the year. We expect this correction to give way to higher prices later in the year and we will attempt to use the volatility to our favor.