The earthquake and tsunami in Japan are enormous human tragedies, and our hearts are very heavy as we try to comprehend it all.  There are so many ripple effects that won’t be revealed until much later, but it seems clear that there will be a short-term global economic effect from the disaster.  Our companies sell to customers in Japan, supply chains are dependent upon components from Japan, and then there’s the consideration of a potential nuclear disaster.

We all know the market does not like uncertainty, which is why stocks have sold off, and bonds have rallied, in response.  The Dow was down 297 at its lowest point today and is now down only 136 points as we write this.  Stocks are pretty much down across the board, although a few sectors have been notably weaker, in particular those exposed to the nuclear power industry.  Uranium stocks have been decimated, utilities with nukes are down a bit, and GE, which sells nuclear reactors and services to nuclear energy producers (including TEPCO), was down 7% in the premarket today, but is now off only 2%.  While there surely was panic selling on the belief GE held some liability on the Daiichi plant, some weakness can be attributed to the fact that GE’s growth prospects have been bolstered by new nuclear deals, and those would now appear to be in jeopardy.  Japanese stocks have been crushed, at one point today putting them down more than 20% from their high just one month ago (but have recovered 6% in the last few hours).  Some companies which have outsized exposure to Japan, notably Aflac, have also been hit.

If there is a precedent for how the global economy will be impacted, it would be Katrina, given the scope of the devastation and the long, complicated road confronting the rebuilding process.  The main differences would be that the affected areas represent a greater proportion of Japan’s area and population, and the loss of life has been much worse.  Assuming the nuclear plants can be brought under control, Japan will undertake a massive rebuilding effort.  If anyone can do this, Japan can do it.  The cost will certainly be far more than that of Katrina.  But Katrina’s impacts on the U.S. economy were negligible.  U.S. companies will need to navigate a lot of change in the short term, but we expect Japan to rebuild and recover.  In the meantime, the U.S. economy has very strong underpinnings, if we look to our favorite leading economic indicators.  We still believe these will carry the economy over the Japan tragedy as well as the uprisings in the Middle East.  We can discuss these issues more in depth at the upcoming lunch.

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