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Investors Continue to Flee Markets Due to Japanese Uncertainty
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.
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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.
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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.
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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.
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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.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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