Bloomberg reports that the formula for investing in Japanese stocks that had previously worked is starting to fail.
That formula involved central bank stimulus combined with a weakening yen to create rising profits and a stock market rally.
However, while that worked back in August, it is no longer working.
Earnings in the Japanese stock market are expected to retreat more than 20 percent this quarter, and the yen just staged its biggest weekly rally since 2009 even though the Bank of Japan has cut interest rates to below zero.
But Japan is not the only country with weakening corporate earnings. In the US, Standard & Poor’s 500 Index companies are about to report the third consecutive quarter of declining income. In Europe, bank stocks are near a 3 1/2 year low as measures of risk in credit markets reach the highest since 2013.
Indeed, John Hussman wrote in his latest article that he thinks that European banks are the “most likely crisis from left field”.
And Hussman is not among those surprised that central bank stimulus is no longer supportng stocks.
"When market internals are favorable, monetary easing reliably supports speculation," he wrote. "In contrast, once a steeply overvalued market is joined by unfavorable market internals, even persistent and aggressive Fed easing is associated with market losses, on average."
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