Japan’s stock market finally back to 1989 levels

The Nikkei 225, Japan’s popular market index, hit a new high this week, following the lead of the S&P 500 in the US. The big difference is the US stock market’s previous high was set 2 years ago, while the last time the Japanese index traded at these levels was 34 years ago in 1989. In the 1960s and 70s, Japan led the world in manufacturing innovation, particularly in the auto sector. This allowed Toyota, Nissan, Honda, and Mazda to gain significant market share in the US versus The Big Three: GM, Ford, and Chrysler. Japan’s strong export-driven economy, along with loose monetary policy, led to a speculative bubble in the 1980s, which peaked at the end of the decade. Their economy has been in a deflationary spiral since, with the Bank of Japan (BOJ) failing to spark inflation via a very easy monetary policy.

• The fact that it has taken Japan’s stock market 34 years to reach a new high set during a prior bubble is a reminder of caution for those that preach passive investing because “stocks only go up over long periods of time”
• This was certainly not the case for several generations of local Japanese investors
• It is also a reminder of how high valuations can go during a bubble
• In the US, it took the NASDAQ 14 years to regain its high set in 2000 during the internet bubble

Nvidia earnings don’t disappoint

Given how much weight new AI technology has been carrying in the market, all eyes were on Nvidia’s earnings this week. While the stock declined for several days prior to earnings, the results, released after the close on Wednesday, exceeded expectations and propelled the stock to new all-time highs. The company reported a 265% increase in revenue from a year ago, and earnings per share were up 769%. The strong results were driven by continued insatiable demand for its GPUs used for today’s quickly evolving AI technology. The stock’s ~16% rise post-earnings drove the whole market higher, with the tech-heavy NASDAQ gaining ~3%.

• While it's not uncommon for a stock to become such a focus for the whole market, it is certainly debatable what it means about the overall health of the market
• Regardless, for the time being, Nvidia’s chips are in significant demand as companies across industries scramble to figure out what their AI strategy is
• As we have written about before, while the valuation is rich, it is far from bubble-like territory
• The big question today is how sustainable this level of demand is

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