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Japan’s Nikkei blows past 34,000 mark for the first time in over 30 years.
In the late 1980’s many investors thought that Japan was going to eat the world as the Japanese index had risen almost 600% over the last decade. In December of 1989, Japan’s Nikkei stock market index hit a high of 38,916, a level that proved to be the last milestone of the country’s asset-inflated bubble economy – a period of excess consumption and overconfidence in the inerrancy of Japan. Soon after, the Bank of Japan (BOJ) raised interest rates to try to tame the elevated inflation alongside speculation nestled in the economy, and equity markets soon lost over $2 trillion over the next 12 months. It has taken over 33 years for the Japanese equity market to recover, and now, with a relatively tamed perception, appear attractive on a relative basis.
There are many times when investing in capital markets that certain themes or ideas are perceived to be permanent, and they don’t quite end up that way. Japanese equities in the late 80’s were one example and U.S. equites can feel as a present-day example. Many investors feel that U.S. large caps are the only asset class that is needed in a portfolio, but with valuations nearing multi-year highs, recent elevated inflation, and central bank intervention, there are similarities between the late 80’s in Japan and present day in U.S. large caps. While we are not predicting a dramatic decline in U.S. equities, we remind investors to remain prudent with a diversified portfolio that is set up to weather many macro-economic backdrops. “Although history does not repeat, it often rhymes.”
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