As I write this, the stock market has just opened again in Japan, and it opened down more than 5 percent. In the United States, CNBC is reporting a wave of selling of blue-chip stocks, which will send the Dow Jones Industrial average down sharply when the markets open in the morning.
Financial stocks were down on Friday in the United States, but stocks were not down much, as the extent of the damage in Japan didn’t immediately sink in on Wall Street. On Friday people were comparing the 2011 Sendai earthquake and tsunami to Hurricane Katrina, partly because in the United States, we were mostly hearing the reports from Tokyo, which was far removed from the most serious damage. We saw more video over the weekend and heard reports of towns wiped away, survivors searching for water, and the prime minister declaring the situation the worst crisis in Japan in almost a lifetime.
It makes sense that financial stocks would decline after a large-scale disaster — insurance companies have new claims to pay and banks may be holding loans that can’t be repaid — but why a selling wave in blue-chip stocks? The first part of the answer is the insurance companies. Insurance companies may hold money for years between collecting premiums and paying claims, and some of that money is in stocks, with an emphasis on stable, predictable companies that will be more likely to maintain their value over a period of a few years. Now insurance companies will be needing cash to pay claims for people who died and buildings and equipment destroyed, so they’ll have to sell some of their stocks. They may want to sell quickly in this case, because there was already a worry that the U.S. stock market was at its peak for the year. If the wave of selling makes other investors nervous, that could lead to more than one day of declines in stocks.
There are other reasons why U.S. stocks should decline after a disaster in Japan. Japan is one of the richest countries in the world, but people there won’t be in a position to buy quite so much for the next five years or so as they focus on rebuilding. Another reason, perhaps the main reason this week, is a sort of battle fatigue on Wall Street as the news this year has brought stories of one extraordinary event after another, including more than a year’s worth of disasters in the last two months. Psychologically, at some point, “We can’t get a break, can we?” goes from being a complaint to an assumption. When that happens, all durable institutions look more risky and less valuable than they did before.