U.S. vs. Japan? A look at comparative markets

Quote of the Week:
"Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense." - Buddah

Recently, I was having a discussion with a client when the subject of Japan came up. With ten years of a stagnant economy in the island nation, the client wondered if that might be a portent of the future for the U.S.

While it's true that Japan's total national debt is second only to that of the U.S. in size, their debt stands at around 200% of their gross domestic product. U.S. debt totals around 100% of GDP currently; too much, many say. Where U.S. debt is owned by individuals and governments around the world, interestingly, Japan's is owned almost exclusively by their citizens. When Japan pays interest on their debt through their tax system, in a real sense, their citizens are simply paying themselves. The same isn't true in America; much of the interest paid goes outside the U.S. In essence, Japan has borrowed a massive amount from its citizens over the years.

This is partly because Japan's economy has been essentially stagnant for over 20 years, with frequent recessions. In 1989, the Nikkei stock index peaked at 38,915 (don't you remember; the media screamed "Japan is buying America!"). At year end, it was just over 8,600; pretty tough sledding. Autos, for decades Japan's behemoth industry, have recently seen significant competition from competitors elsewhere in Asia. The 2011 tsunami continues to challenge even the remarkable resilience of the Japanese.

But the U.S. economy is remarkably resilient too. Unlike the steady stream of American innovations, such as the iPhone and others, that flow constantly into the marketplace, Japanese innovations been few in comparison. While it's true that Japan's military spending is negligible at around 2% of GDP compared to the U.S. at about 17%, it's also true that the U.S. economy is around 12 times the size of Japan's. Put another way, the U.S. spends around twice as much on defense alone as the entire GDP of Japan. Much of the defense spending budget goes to U.S. companies and workers, of course.

While Japan must continue to deal with the economic impact of the recent nuclear disaster and tsunami damage, the U.S. sees a reduction in military activities (and perhaps spending) and an awakening of corporate profits unlike anything in recent history. While Japan deals with the impact of lower cost labor throughout Asia cutting into the markets for Japanese goods, Boeing and Intel are opening their newest plants in the U.S. Other large corporations are finding that higher manufacturing quality in the U.S. means a more profitable output in some cases. The result: the next 10 years in the U.S. in economic terms and market terms could be very good.

The historic commitment and passion of the Japanese people will likely move that economy forward, in our opinion. But the most dynamic and resilient economic machine in our view is still that of the United States.**


Market Week: January 17, 2012

The Markets

Two in a row: Helped along by benign economic reports, domestic equities built on last week's gains. However, market leadership migrated to the Nasdaq and small-cap Russell 2000. Friday's after-hours release of Standard and Poor's European downgrades prevented the news from having much impact last week, though rumors weighed on markets during the week's final hours.


Last Week's Headlines

• Standard and Poor's downgraded the AAA bond ratings of both France and Austria to AA+. It also cut Spain's rating to A and Italy's to BBB+, and reduced Portugal's rating to BB (junk bond status), all of which are likely to increase the cost of borrowing for those countries. Because France is Europe's second-largest economy and a pillar of the European Financial Stability Fund, the downgrades raised concerns about the impact on the fund's bailout capabilities.
• Meanwhile, the German economy contracted by 0.25% during the fourth quarter, and the 3% growth rate for all of 2011 was lower than the previous year's. Both the European Central Bank and the Bank of England kept their benchmark interest rates at 1% and 0.5%, respectively.
• Falling exports and higher foreign oil imports helped increase the U.S. trade deficit by more than 10% to $47.8 billion in November, the Commerce Department said. That's the largest increase since May.
• The Commerce Department also reported that retail sales rose 0.1% in December, up 6.5% from last December. However, not counting a 1.5% increase in auto sales, retail sales were down 0.2%.
• The Federal Reserve turned over to the U.S. Treasury $76.9 billion in net income, derived mostly from interest earned in 2011 from purchases of U.S. Treasuries and mortgage-backed securities bought as part of its quantitative easing programs. That's slightly less than the previous year's $79.8 billion, but still well above 2009's $47.4 billion.
• The Fed's "beige book" report said economic conditions increased at a "modest to moderate pace" during late November and December. That was an improvement from earlier in the year, and was helped along by retail sales that beat last year's and strong auto sales.


Eye on the Week Ahead

Though the reaction to the European downgrades will likely steal the spotlight, a data-heavy week also will include inflation and manufacturing data.

Key dates and data releases: Empire State manufacturing survey (1/17); wholesale inflation, industrial production, international capital flows (1/18); consumer inflation, housing starts, Philadelphia Fed manufacturing survey, weekly new jobless claims (1/19); home resales, options expirations (1/20).



Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2012