5 Upsides to Global Turmoil

The unnerving events of 2011 have stress-tested the economic recovery.

By + More

Radiation leaks. Bloodshed in the Middle East. The possibility of western airstrikes in an oil-producing nation. This is not the kind of news that cheers consumers or boosts confidence in a halting economic recovery.

[See 10 industries that will hire the most in 2011.]

So far, 2011 has been a year of unforeseen shocks and frayed nerves. Uprisings in the Middle East caught investors by surprise and rattled the oil markets, just as the global economy seemed to be getting back on its feet following the Great Recession. Then the Japanese earthquake and tsunami derailed the world's third-largest economy. And scary headlines about the unthinkable disaster at Japan's Fukushima nuclear facility have been a stunning reminder that things can still go terribly wrong.

As long as the Japanese disaster doesn't get much worse and manufacturers adjust to supply-chain disruptions, the economic shock ought to stay mostly contained in Japan. A huge rebuilding effort may even boost Japan's economy later this year and next, offsetting some of the damage. It's a similar story in the Middle East, where uprisings in Egypt, Libya, Bahrain, and other nations may transform the region, but leave global markets more or less intact. There may even be some opportunities that emerge from all the turmoil. Here are a few possible upsides to the unnerving events that have occurred so far in 2011:

A stock-market stress test. The twin shocks of Middle East unrest and the calamity in Japan have given skittish stock investors plenty of reason to head for the exits. But for the most part, they haven't—and that could signal enduring faith in the economic recovery.

[See who inflation hurts the most.]

On the day before the Sendai earthquake, the S&P 500 was up about 3 percent for the year, and up a remarkable 94 percent from the low point reached in March 2009. By any measure, that's an impressive bull market. But some analysts believe the rally has run its course, with the markets due for a correction. One possible sign of a correction is the return of small retail investors to the market, after they bailed out near the 2009 lows—the worst time to sell. If last-in investors are finally chasing stocks once again, that could signal that the institutional smart money, usually a step or two ahead, is headed elsewhere. That's on top of fears that markets will fall if the Federal Reserve ends its quantitative easing program this summer, as expected. That program has helped boost stocks, by giving investors incentives to invest in them. So the end of the program could trigger a pullback.

Japan's Nikkei index tumbled following the disaster—which seems roughly appropriate, given that Japan probably faces a fresh recession on account of it. But the S&P 500 has barely fallen, with investors reacting as much to good economic data as to bad news out of Japan. And bargain hunters have been scouring depressed Japanese stocks looking for smart buys. "There is a pool of investors ready to buy the dips," analyst Charles Payne, CEO of investing firm Wall Street Strategies, wrote in a recent note to clients. "Throughout this pullback the resolve has been encouraging, almost too encouraging." There could still be a correction coming, but investors also seem to worry that they'll miss out on gains associated with a strengthening recovery if they pull out of stocks now. That signals strong sentiment that something is going right.

[See 3 big lies about cutting the deficit.]

More stable oil prices. The direction of oil prices is notoriously hard to predict, but the sobering news from Japan may have tempered speculative fervor that was starting to generate an oil bubble similar to the one in 2008. Since the start of the year, bloody rebellion in Libya and unrest elsewhere in the Middle East has sent oil prices from about $86 per barrel to a peak of nearly $105, which in turn has pushed U.S. gas prices up by about 50 cents per gallon, to an average pump price of about $3.55. But most of that rise is a "fear premium" based on worries that a big oil producer like Saudi Arabia could get embroiled in the unrest.

The Japanese disaster has helped restore economic fundamentals to the oil markets. Oil prices initially drifted back to $100 or so, based on the belief that a contraction in Japan's economy would reduce demand for oil. But the nuclear disaster in Japan could ultimately force the island nation to import more oil and natural gas, to make up for power-generating capacity lost in the destruction at Fukushima. That could push prices back up, but for the right reason: Demand is actually increasing. The "risk of severe oil shock from prices surging to new highs is less likely, in our view, given greater concern to global growth from recent events," Bank of American Merrill Lynch wrote in a recent research note.

[See why $4 gas need not wreck your budget.]

Market share gains for U.S. automakers. As industrial disruption persists in Japan, it seems certain that Japanese automakers will experience some vehicle shortages on their home turf and in other markets as well. The majority of Japanese cars sold in the United States are also built here, and the earthquake proved the virtues of a "transplant" strategy that effectively spreads the risk of relying on production in a single country. But many U.S.-made Japanese models rely on parts shipped from Japan, as do a few Detroit makes. General Motors, for instance, has stopped production of GMC Canyon and Chevy Colorado pickup trucks in Louisiana because it can't get a few needed parts from Japan.

If Japanese automakers can't keep up with demand, competitors will obviously benefit. That's what happened when GM and Chrysler declared bankruptcy in 2009. Ford was a prime beneficiary, but so were the Japanese automakers Toyota, Honda, and Nissan, and the Korean car companies Hyundai and Kia. There's no pride in profiting from the misfortunes of a competitor, and Detroit will no doubt be subtle about it. But they certainly won't turn away new buyers, either. "If Japanese-brand vehicles are in short supply, that will shift demand to other brands," writes Nariman Behravesh, chief economist for forecasting firm IHS Global Insight. "If domestic parts can be substituted for Japanese parts, then demand for domestic auto parts suppliers will rise."

[See why baby boomers are bummed out.]

A boost for American energy producers. The first three months of 2011 have raised fresh worries about two of the world's prominent sources of power: oil and nuclear energy. That will boost the prospects for natural gas, which unlike oil, the United States has in abundance. If oil prices remain elevated and nuclear power suddenly seems like a risky alternative, that could also increase the appeal of solar, wind, and other "green" forms of energy that are environmentally friendly but, up till now, economically dubious. "Investment in energy production and energy efficiency should only rise," advises Bank of America Merrill Lynch. "The U.S. can become a bigger energy producer given the advantage of lower U.S. natural gas prices."

Downward pressure on interest rates. Some analysts have worried that Japan, which is the second-largest foreign holder of debt issued by the U.S. government, would cash in many of those securities to help pay for rebuilding. Theoretically, that could flood the market with Treasury securities and drive up long-term interest rates, which would make mortgages more costly and also raise Washington's borrowing costs. But so far, the opposite has happened. Japan's central bank has actually been buying government securities and other assets, to drive down the value of the yen and aid Japanese exporters. And fear in general has generated the usual "flight to quality," with demand for treasuries going up, not down, and rates falling. "The risk of a U.S. interest rate shock is lower, we believe," says Bank of America. If the world settles down, that could change. But investors would welcome a bit of calm, too.

Twitter: @rickjnewman