Foster Group

The devastation that's taken place in Japan recently as a result of the natural disaster is almost beyond human comprehension. Nature has a way of reminding us from time to time how truly vulnerable we are.

The added specter of a possible nuclear disaster only heightens the concern. The outcome of that situation could reverberate, not only in Japan, but in policy decisions around the world, for many years, as did the accidents at Three Mile Island in 1979 and Chernobyl in 1986.

At times of human tragedy, making observations about impact on markets and economies can seem insensitive, even inappropriate. We mean no disrespect, nor do we seek to minimize the human element; we fully realize thousands of lives have been lost and literally hundreds of thousands of others impacted; economic and market considerations are secondary. We know, however, that our clients look to us for perspective in times like we're witnessing today.

As with any disaster, there is an economic component to the Japanese tsunami. Early estimates of cost range near the $100 billion mark. This is similar to the $80 billion-plus impact Hurricane Katrina had on the US. The good news is that the heaviest damage in Japan is in areas that represent a small part of Japanese economic output.

Japan's economy is the third-largest in the world, having just recently been surpassed by China. It is a major player in finance, industry and technology. Japan has spent the last twenty years struggling to recover from its real estate and stock market collapses of the early 1990's. This added burden will make that task more difficult, but not impossible. It may have a near-term effect on Japan's GDP; perhaps an increased risk of a Japanese recession. This is far from a certainty, however. Many foresaw recession in the US as a result of Hurricane Katrina, which never materialized.

History clearly shows the resilience and determination of the Japanese people. They have recovered and rebuilt from many disastrous situations, both natural and man-made, over the past several decades. It is highly likely they will do so again, hopefully with the assistance of the world community.

From a market perspective, it's safe to assume the level of near-term volatility is likely to be higher than normal. Events of significant emotional impact typically create anxiety in investors, causing many to seek what they perceive as "safety" and avoid risk. This is likely to cause prices to fall in the short run. We do not believe these losses will be permanent, and we encourage our clients to maintain their present allocation, unless there's been a substantive change in their personal financial situation that might of itself dictate a change.

In this tragedy, we can see again the wisdom of broad diversification. Any market can suffer an unexpected crisis, whether economic or financial. Any country can suffer a disaster, natural or man-made. The best defense against all of these is to diversify broadly across countries, across segments of the market and across asset classes. This preparation was made in our client portfolios long before the current disaster occurred.

We are firm believers in the long-term resilience of markets and the human spirit. We believe Japan, the world and the markets will overcome.