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Japan Quake Adds to Litany of Investor Woes

NEW YORK ( TheStreet) -- The crisis in Japan is weighing heavily on market sentiment, especially among retail investors whose confidence had already been shaken by the uprisings in the Middle East.

"This is what the market does. Whenever it gets comfortable, it gives you a gut check. That's what sets up the next run," said Jim Paulsen, chief investment strategist with Wells Capital Management,

Just last Wednesday, markets were celebrating a two-year bull run that had pushed stock prices back to pre-Lehman collapse levels. The retail investor had plenty of reasons to be optimistic -- strong corporate earnings growth, fair valuations, a slowly improving jobs outlook, a strong recovery in manufacturing and consumer spending and the threat of a double-dip recession that had haunted markets through most of last year was finally behind them.

But that confidence was tenuous at best. The cracks started to show as political unrest began spreading across the Middle East and North Africa in late January. Today, uncertainty on multiple fronts has investors nearly paralyzed. The focus is currently on Japan, where the death toll and destruction from its massive earthquake Friday continues to mount, threatening to cripple its debt-burdened economy further.

A nuclear crisis is also looming large, with Tokyo Electric's Fukushima nuclear power plant suffering serious explosions in the aftermath of the quake and subsequent tsunami. Experts are scrambling to contain radiation leaks.

Investors, have faced a continuous barrage of significant threats in the last few months and indeed, in the last three years. The European debt crisis and the flash crash made the summer of 2010 a rocky time for equities. And investors will likely never forget the months following the collapse of Lehman Brothers, when governments were forced to bail out banking behemoths or risk sending the global economy into an abyss.

"We have a populous that suffers from Armageddon fatigue, especially after two years of having another Armageddon every month to worry about," said Paulsen.

However, the market has proved to be relatively more resilient in the wake of the recent crises. Despite the recent spate of bad news, the Dow has so far not dropped more than 2% on any single day in 2011.

Contrast that to last summer, when the market suffered drops of more than 2% on six days between May and July, as investors dealt with the prospect of sovereign debt defaults. The May 6 flash crash drove the Dow lower by 3.2%.

Paulsen sees the relatively small correction in the market so far as a sign of underlying strength. "We've been preparing for the next Armageddon for two years. As bad as this is, it's not like anyone wasn't prepared. Nobody was overexposed to stocks and no one ran through their cash. Everyone is pretty hunkered down to begin with."

Economists in any case expect a slowdown in Japan's economy to have only a small impact on the U.S., given that trade with Japan has diminished in recent years.

John Canally of LPL Financial says investors are using Japan as an excuse to book profits after a steep run up in stock prices. "At the end of this, no one is going to say this(Japan's earthquake) is what dipped the world back into recession. No one expected much out of Japan before this," he said.
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