IS THE NIKKEI A LEADING INDICATOR?
30 August 2009 by Cullen Roche
8 Comments
Guest contribution by Dean:
Today, I had an epiphany, thanks to a Bloomberg article comparing the Nikkei225 performance of 1980 to present vs. the Dow from 1990-today. The basic idea is that since the Nikkei peaked in 1990 (actually 1989) and our Dow in the year 2000 (a good ten years latter), that there must be some useful lessons of comparison. Would a further 40% Dow upside surprise you? Here is the thesis and the accompanying graph:
On the face of it, the thesis is intriguing but is it reliable? Let’s take a look starting with the Dow vs. Nikkei225 for the last six months:
There is an almost identical performance of the two indices, in fact it seems that one follows the other in lock step. From an empirical point of view we all have seen how a certain performance on Wall Street (whether up or down) is quickly followed next day by the Nikkei. There are small deviations of course (one should not forget one index represents an Asian market and the other an American) but overall the two indeces look to be identical. Consequently the first doubt arises: How can one market, being almost an exact carbon copy of the other today, be a good predictive tool 10 years later? In other words the similarity of performance is a day or two apart, not ten years apart.
Then let’s look at one year comparison:
Observations: the similarity continues. The only difference I noticed is that last October ’08 the Nikkei made a lower low, almost equal to its March ’09 low and thus became a better recovery prospect as a double bottom from a technical analysis POV. Otherwise the same similarity and doubt persists as above.
Perhaps a two year comparison might reveal something different?
Observations: the same pattern. Almost identical with a slight October 2008 Nikkei overreaction to the downside. No discoveries here to remove doubt that two indeces mirroring each other in real time could become predictive tools for one another when separated by 10 years.
Yahoo Finance offers also a five year comparison:
Observation: similarity continues, Nikkei moved at a bit higher scale during the 2006-2008 period, but it converged before and after. Nothing to remove doubt that the two indeces are only similar during real time.
This might be a bit confusing, but let’s look at maxima:
Observation: Nikkei225 data begins circa 1984 which is a problem for the Bloomberg graph showing a start in 1980. Other than that, one might get the idea that some cutting and pasting could produce a similarity scenario or two.
Before I give you my final conclusions, let us be reminded of some salient facts:
- Japan is an export nation with high savings rate and a stock market bubble that burst in 1989-1990.
- The United States are primarily an importing nation with low savings rate (albeit improving lately) and its stock market bubble burst in the year 2000 and then again in 2007.
My conclusions are as follows:
Due to commerce and global economy connectivity the two markets are very similar in real time, in fact the Nikkei225 seems to follow the Dow with high fidelity. What happens in one market the other reflects almost instantaneously. Artificial comparison of the two markets ten years apart is a bit of a stretch. If you follow my logic Dow movements mirror Nikkei225 movements. By comparing the Dow and Nikkei225 ten year apart amounts to the admission that 10 years later the Dow will resemble itself today. That’s what I call a catch 22, a circular argument, a logical loop.
To my eyes, one fatal flaw here is that one 70s & 80s global market could be in growth mode while another was in recession. America, Japan & Europe markets could be, and were, in different phases all the time.
Today, the market is global & this concept no longer applies. (New Chinese credit bubble notwithstanding.) Everyone is looking for, but nobody has found, de-coupling. As shown in your data, the globe is just one big market & they all go up & down together. Further, the “one trade” premise has applied not only to stocks, but also materials, PMs, bonds, real estate, CRE, CDS/MBS/CMBS, credit spreads, etc., etc., etc.
This point, of course, does not address the underlying premise of imagining the 2009-10 US market will continue to mirror Japan from 20-odd years ago. In the sense that we’re coming out of the same problem & offering many of the same failed solutions, it seems possible. However, in my view, they are way too many “different” variables (see fatal flaw(s) above) for the similarities to be assumed as continuing.
How did you adjust for currency on Yahoo? I can’t find a way to do it.
TPC:
Thanks for posting. I hope it is conducive to the animal spirits of a good conversation.
Thank you very much Dean and TPC for responding the question I had in “Weekend Reading” when I first saw the 40% pop 10 years apart from a Merrill strategist. It would be truly amazing as Main street is not doing well but the market is up with lots of excess liquidity/printed money. It looks the market short term still wants to go higher due to liquidity and “better than” surprises against negative seasonality and market is dominated by a few major institutions. I thought I saw something about powers that be wanted to push USD higher. If true it could be another factor for a pull back but lots of people thinking pull back so it might never come.
Regarding the B of A analysis (Top Chart). While unlikely, its possible for the dollar to surge 40% against the Yen and the S&P flat lines which would end in the same result.
On the same topic:
http://blogs.reuters.com/felix-salmon/2009/08/29/silly-chart-of-the-day-data-fitting-edition/
TPC
I saw this same article, but came away with a slightly different spin. First, I struggled with the start points being 1989 & 2000. In Japan, after 1989, the Nikkei never again approached it’s former high. However, the S&P surpassed it’s previous high in 2007. So, for me the comparison is flawed from the beginning.
I do think the points in time are similar enough to warrant comparison. Government intervention was the dominant event influencing both economies. Except for the start of the 1989 crash, the remaining “rebounds” were due to government stimulus; which is what I see occurring now. As the stimulus begins to fade in Q4, the economy will slow and earnings will be missed. Japan has shown this pattern for 20 years. I believe the US will do the same.
The US consumer is down for the count; and only government intervention will cause the economic metrics to go up. Not an organic recovery.
I saw the Bloomberg chart on Friday and came away with two things. First, wow, maybe it is a possibility that this rally continues to 1,300 or 1,400 before a significant decline. No one seems to expect that. Second, is this the general fate of the US and many other world markets? Are we in a longer term secular bear market with some big cyclical bull markets along the way (currently on the second)? Just like Japan following the bubbles bursting.
I had been thinking more along the lines, that this is a bear market rally in a three or four year bear market. Maybe March was THE bottom between now and 2011 and maybe not. Either way a test at some point was most likely.
This chart made me think maybe this bull continues for a year or two more before reality catches up with it and sends the market to possibly lower lows. If the market does continue up to 1,400 or so during the next year (against all odds), then almost all the bears will have been converted to bulls as they were in October 2007.