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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:

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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.

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