What are we to make of the world these days?
In the aftermath of the earthquake in Japan and the tsunami that followed, along with all of the ongoing turmoil in the Middle East, it seems appropriate for us to pause and reflect. Through electronic media we’ve witnessed the human element of families searching for their loved ones. We’ve seen the destruction of homes and communities and watched people fight for the basic freedoms and human rights that we tend to take for granted in the US. All this can lead to feelings of empathy and gratitude.
Nonetheless, mutual fund families, brokerage firms, researchers and Wall Street analysts, are quick to opine on the economic ramifications of these global events. Frankly, like most opinions and predictions, they vary widely. In fact, they differ to such a degree that only one logical conclusion can be reached. No one knows for sure.
We do know, however, that in the last decade we have seen repeated natural disasters around the world including devastating earthquakes in Haiti, China, and Pakistan. We have also witnessed hurricanes, cyclones, and tsunamis, in the Gulf Coast, Myanmar, and Indonesia respectively. In the last ten years we have seen man-made disasters as well. These include the massive BP oil spill off the Gulf Coast, military conflicts in Iraq, Afghanistan, and Libya as well as terrorist attacks around the world that seem to occur regularly. Though these disasters do occur with some regularity, they remain impossible to predict, and yet the global economy continues to expand over time.
But is Japan different? After all, it is the second largest country in terms of global stock market capitalization. In 2007, the scholars Hideki Toya from Nagoya University and Mark Skidmore from the University of Wisconsin wrote a paper entitled “Economic Development and the Impact of Natural Disasters.” Their findings may be summarized as follows: countries with higher incomes, higher educational attainment, greater openness, more complete financial systems, better developed supply chains and decentralized governments experience fewer losses in the long run. Given this criteria, it is clear that Japan is well positioned to recover from this calamity.
What of the Middle East? Though the area has a history of turmoil, the countries themselves collectively represent a very small percentage of the total global stock market; in fact, less than one tenth of one percent. Though the impact of the Middle Eastern activity on energy prices is significant, we can be encouraged that the amount of money actually invested in publicly traded stock markets in those countries is miniscule.
From time to time we also experience what might be called economic disasters. These events also happen with some regularity, and are equally impossible to predict with any accuracy and consistency. In the last decade these include the dot.com bubble that burst in March of 2000 and the more recent subprime financial crisis, or The Great Recession, as it is called.
Even after (or during) these events, we find that our economy is very resilient. US stock returns have climbed back in the last couple of years. Consumer spending, corporate earnings and GDP are at all time highs. Unemployment, though still high by historic standards, has been improving recently, and the total global stock market has increased dramatically over the last two years.