For investment strategist Robert Froehlich, the devastating earthquake and tsunami in Japan changed everything.
"The events in Japan will have the single greatest impact on your portfolio as any external event in the last 25 years," said Froehlich, the chief investment strategist for wealth management at The Hartford, during a stop Tuesday in Buffalo. "Japan just changed everything for us."
The fallout from the Japanese disaster could fuel inflation and spur faster economic growth in Japan as it recovers. It also means interest rates will stay low at least through the summer, but then could spike through next spring, Froehlich said.
What does that mean for investors in the United States?
"We like stocks. We're afraid of bonds. And we love commodities," he said during a presentation to investors arranged by the local Bank of America Merrill Lynch office.
The most immediate impact that investors felt from the March 11 earthquake and tsunami was the impact on interest rates. With Japan scrambling to rebuild and restore production, it ended any chance that the Federal Reserve would raise interest rates this spring or summer from their historic lows, Froehlich said.
Instead, Froehlich thinks the earliest the Fed will consider raising rates will be this October, giving the Japanese economy more time to recover. "Rates now have to stay lower longer than they should because of Japan," he said.
And if the Fed does start raising rates this fall, Froehlich thinks it will be a rapid rise, timed to end by next spring, just in time for the start of the presidential primaries.
It's also possible the Fed could wait until after the election. But either way, once rates start going up, Froehlich expects the rise to be rapid.
That will be bad news for bond investors, because bond prices fall when interest rates rise.
But that's not all. Froehlich expects bond investors to get hit by the second leg of a double-whammy because he expects inflation to pick up, fueled by higher commodity prices and the biggest federal budget deficits since the Great Depression. Inflation eats away at the interest investors earn from bonds.
"The two biggest concerns for bonds are higher interest rates and inflation," Froehlich said. "Higher rates and inflation are both coming."
Yet Froehlich also thinks the Japanese quake will give a boost to the U.S. economy as competitors here and elsewhere pick up extra business created by the supply disruption caused by damage to Japanese factories.
Still, he expects unemployment to remain stubbornly high in the United States, with small businesses lacking the confidence to hire and big businesses unwilling to hire after slashing thousands of jobs during the recession.
"Corporate America realized how overstaffed they were," Froehlich said. "Those jobs aren't coming back."
Froehlich is partial to energy stocks, the materials sector and industrial stocks. He also favors stocks that pay dividends, which could rise as companies return some of their cash, now at a 61-year high, to investors.
He also likes investments in commodities, especially in the energy sector, and in food, such as corn and livestock, to take advantage of the strengthening growth in emerging markets and the expected emergence of a middle class in those markets.