post-earthquake stock performance patterns

checking out a change in market direction

When the market makes a decisive change in direction, it’s always good to step back and analyze the composition of the advance.


When the market changes direction, market leadership often changes as well.  In addition, when the cause of the change is a readily identifiable event like the earthquake/tsunamis in Japan, it’s important to check what you think the market should be doing in response to the development vs. how the market actually is performing.  If you don’t, you may only acknowledge data that’s in line with your presuppositions.  If so, you risk losing performance by sticking too long with yesterday’s winning ideas in tomorrow’s market.

In this case in particular, my impression–before looking at the facts–is that the reaction of the S&P 500 to the earthquake has been too emotional and rather superficial.  In other words, I think that some stocks may be being unduly punished and others irrationally bid up in price in expectation of rewards that are unlikely to materialize.

begin with sectors

Let’s start with S&P sector performance from March 14th, the first day the US market was open after the full impact of the earthquake in Japan was known, through last Friday, April 1st.

Performance ran as follows:

Telecom          +7.2%

Materials          +6.7%

Energy          +5.3%

Industrials           +4.2%

Finance          +2.5%

S&P 500          +2.2%

Staples          +2.1%

Consumer discretionary          +1.9%

Utilities          +1.3%

Healthcare          +1.2%

IT          +.3%.

Full-month sectoral results for March and for the first quarter of 2011 can be found on the Keeping Score page.

post-earthquake differences

The main changes I see are these:

Telecom, Materials and Finance join Energy and Industrials as outperformers.

Healthcare, on the other hand, drops like a stone.  It, Consumer Discretionary and IT join Staples and Utilities as significant laggards.

It makes sense to me that investors would bid up the Materials sector on the idea that reconstruction, whether in Japan or elsewhere, will use lots of extra building materials.  Similarly, uncertainty about component supply might depress IT stocks.

On the other hand, I have no idea why Healthcare should suddenly become less attractive.  How does the Telecom sector benefit from the problems in Japan?  …I think the outperformance there is the result of the consolidation in the wireless arena and has nothing to do with Japan.  After all, the S&P sector only has 9 constituent companies, so changes in one or two names can make a big difference to sector performance.

a closer look:  individual stocks

Some investors, even professionals, try to stay on the level of the “big picture” and shape their portfolios based chiefly on what they consider overarching trends.  Known as “thematic” investors (calling someone that is an insult, though slightly veiled), they may have short-term success, but usually flame out in spectacular fashion.  The only people who can make money while remaining at this low level of sophistication are the talking heads on cable TV. 

Looking a little deeper, then:

currencies, since the earthquake

Korean won/¥          +5.4%

€/¥          +3.7%

$/¥          +2%.

Yen weakness may partly be the result of intervention.  There may be more to it than that, however.

I’ve been thinking that the earthquake may change multinationals’ ideas about where a second source of production should be located.  No manufacturing company wants to rely on a single supplier for key components.  Firms always want a second source.  I think that firms are being forced to the realization that having two Japanese component makers, one two miles down the road from the other, as sources gives you some protection against price gouging.  But it’s no help in a natural disaster.  In fact, the possibility that electricity will be rationed across Japan for some time to come suggests that even having a second source in the same country isn’t good enough.

I suspect multinationals will be trying to develop alternate sources of supply in Korea or Greater China–meaning a long-term net loss of economic activity in Japan.  The weak yen may be telling us this.

Looking at stocks (all percentage changes are calculated in US$):


S&P 500     +2.2%

Topix (the Japanese equivalent of the S&P)     -6%

Japanese utilities

Tokyo Electric Power          -79%

Tokyo Gas          +6%

Tokyo Gas has outperformed the Japanese market by 12%, as investors look for alternate suppliers of utility services.  I no longer know Tokyo Gas well, but the move seems logical to me.

construction machinery

CAT          +13.1%

Hitachi Construction Machinery          +4%

Kubota          -4%

I don’t get it (I say this even though I own CAT).  All three companies do basically the same thing, and 100% of the reconstruction business is going to go to the Japanese firms.  There could be some subtle thinking at work here–maybe that Japanese public opinion or government action will force HCM and Kubota to provide machinery on concessionary terms, using up their productive capacity and leaving higher-margin business elsewhere for CAT.  My guess, although (again) I don’t know the Japanese firms well anymore, is that HCM and Kubota have upside that is generally unappreciated.  CAT has gone up because it’s easier for US investors to buy, even though it’s probably the worst positioned of the three to participate in Japanese rebuilding.


BMW          +8.7%

F          +5.5%

GM          +1.5%

Honda          -3.5%

Toyota         -6%

The luxury brands of Toyota and Honda are the ones whose models have the greatest Japanese content.  The two automakers also have by far the biggest exposure to the Japanese car market.  So I understand why there should be a wide spread between them and luxury car maker, BMW.  If BMW sources its car electronics from European semiconductor companies, then the absolute price performance makes sense to me as well.


Samsung Electronics          +12.5%

MU         +10.5%

ARMH          +8.4%

WFR          +6%

TXN          -.5%

MIPS          -4.5%

INTC          -5.5%

Shinetsu Chemical          -6.5%

Renesas          -20%

Renesas is the product of the merger of semiconductor operations formerly run by NEC, Hitachi and Mitsubishi Electric.  It makes DRAM, and other commodity semiconductors used in cellphones and autos.  Its plants have suffered extensive damage.

Shinetsu is the leader in another commodity semiconductor business, making silicon wafers.  These are the main raw material chips are built on.  It too has had a lot of plant damage.  So it makes sense that the stocks of these two companies have gone down (although Shinetsu is an outperformer vs. TOPIX)–and that the shares of rivals Samsung (a world leader in commodity semiconductors), MU and WFR (two middling firms that happen to be in the right place) have gone up.

One anomaly I see is in the relative performance of TXN vs. INTC (I own it) and ARMH vs. MIPS:

TXN is roughly flat, despite having had considerable plant damage in Japan.  INTC is down, despite having had none.

MIPS and ARMH are both intellectual property companies.  They sell their chip blueprints to a wide swath of fabless chip firms who incorporate them in their designs.  The profits of  both are vulnerable to any earthquake-induced materials or components disruptions that slow component manufacture; that slows the flow of royalties customers pay them.  I don’t think there’s any sure way to figure out how their businesses are likely to be affected.  The most reasonable assumption is that the same thing is likely to happen to both.  Yet MIPS (trading on 23x historical earnings) is down and ARMH (trading on 90x) is up strongly.

consumer electronics

Panasonic          -.3%

AAPL          -2%

Sony          -5%.

Two thoughts:

–AAPL is down;  ARMH, which powers AAPL cellphones and tablets, is up a lot.  ???

–Panasonic, a strong company, is flat;  Sony, a bad one with high exposure to Renesas, is only down 5%.  ??

luxury goods

LVMH          +4%

Hermes          +1.3%

TIF          -1%.

The oddity that I see is that, despite all three having significant exposure to Japan, their stock prices have been relatively unaffected by the earthquake and loss of electricity (hard to buy stuff in a store where the lights are out) in this important market. (By the way, I own TIF.)


There has been a market reaction to the Japanese earthquake.  It can be seen in the S&P 500 through relatively good performance by the Materials sector, and though an accelerated underperformance of the IT sector.   Hard to argue with that, though I personally think supply chain disruptions will be far fewer than the market now thinks.

The investor response within sectors is a bit more uneven, though not the crazy level I had anticipated finding.  The company performance relationships seem ok to me in the Japanese utility, auto, consumer electronics and luxury goods industries.

In construction machinery, on the other hand, the Japanese firms that will presumably receive all the rebuilding orders have substantially underperformed CAT, which probably won’t receive anything.

Investor behavior in the semiconductor sector is the most eccentric, in my view.  My guess is that professional portfolio managers have examined their IT holdings with an eye to : 1) reduce weightings, and 2) eliminate holdings that are exposed to plant damage in Japan.  But they’ve ended up doing something different.  In my experience, this often happens.

They’ve ended up selling weaker, or poorer performing, names in a sub-sector, and using part of the money to build up their positions in companies that have shown positive price momentum.  They may also have trimmed huge positions, like AAPL, which just about every professional portfolio manager owns.

Whatever the reason may be, companies whose fortunes are closely linked, like ARMH and AAPL, have performed differently, for no good reason that I can see.  So too have TXN and INTC, and ARMH and MIPS.  My guess is that the relative performance of these pairs will soon reverse themselves.

One other point:  with the punch of a few buttons, a professional can almost instantaneously have a printout of the absolute and relative performance of all of his positions over any time frame–including from March 11-April 1.  If he wants, he can have the report show his portfolio constituents–broken out by individual stocks, industries and sectors–compared with the performance of the corresponding portions of his benchmark index.  He can not only see his performance at a glance, but also what stocks outside the portfolio are doing better or worse than his.

Try getting this info as an individual from your broker.

Why aren’t these data available?  For one thing, you might need some instruction to be able to read a report intelligently.  For another, it would show whether your trading activity is profitable or not.  Your brokerage firm makes most of its money based on the amount of trading you do, not on your success.  So there’s no upside to letting you know you’d be better off trading less, or not at all.

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