Hurricanes, economics and markets
Millions of Americans are grappling with the immediate aftermath of Hurricane Harvey and the massive destruction the storm caused in Texas and Louisiana. The recovery from Harvey had barely begun when we were forced to turn our attention to Hurricane Irma, which ripped through the Caribbean on its way to Florida. Irma impacted much of the southeast U.S. with heavy wind, rain and tidal damage.
It's been five years since we witnessed Hurricane Sandy firsthand here in Delaware, and 12 years since catastrophic Hurricane Katrina, and it sadly looks like 2017 will be another historic season for hurricanes in the U.S.
As investors, watching these tragic events unfold, we are faced with two immediate questions. First, and foremost, how can we help? Storms and disasters of this magnitude require enormous help, not all of which can be supplied by government. Second, what impact are these hurricanes likely to have on the U.S. economy, and what is the likely reaction of the stock market in the coming weeks and months?
Economic impact of hurricanes
Damage estimates for Hurricane Harvey are running between $100 billion and $150 billion. On an inflation-adjusted basis, this is roughly equivalent to damages caused by Hurricane Katrina and far more than what was caused by Hurricane Sandy. The damage impact of Irma is unknown, but it certainly has the capacity to equal Harvey in its destruction.
However, as mind-boggling as those numbers are, they are actually miniscule relative to the size of the overall U.S. economy, which is projected in 2017 to surpass $17 trillion. In perspective, the dreadful 2005 hurricane season hit the U.S. with Katrina, Wilma and Rita, and inflicted combined damages of over $208 billion. This represented about 1.43 percent of that year's gross domestic product.
Even if the total damages inflicted by Harvey and Irma surpass a record $300 billion (the costliest natural disaster on record is thought to be the 2011 earthquake and tsunami in Japan), the total damages would represent roughly 2 percent of this year's projected GDP.
The fortunate news for the U.S. is that these types of natural disasters tend to be easily absorbed by an economy as broad, diversified and dynamic as ours.
This is not to imply that the damage is insignificant, particularly to those impacted, but rather to put the enormity of destruction into the context of the overall U.S. economy. In my research, I could find no example of a hurricane or other U.S. natural disaster being sufficient to cause the economy to tip into recession.
Some analysts may even suggest that the impact is a net positive to the economy, but I believe this goes too far. Although some participants in the economy may benefit, it is only because others are losing ground. For example, it is estimated that some 500,000 cars have been destroyed by Harvey flooding and will need to be replaced. Good news for the automakers, but not so good for the insurance carriers who will bear much of the cost.
The economy may be able to easily absorb and recover from these disasters, but they are never good-news events. Destruction is destruction.
Stock market reaction to hurricanes
Like many other unforeseen events, hurricanes often cause short-term volatility in the stock market as market participants try to gauge how profits will be impacted in different sectors. The market likes stability, and it can be unsettled by the uncertainty surrounding the storm’s effects.
Ultimately, however, the volatility tends to ease as the full impact becomes quantified. The trend that existed before the hurricane tends to reassert itself. When hurricanes happened while the market trend is negative, such as hurricanes Allison (2001), Gustav (2008) and Ike (2008), the negative trend continued. However, when the trend is positive, such as is the case today, that trend also continues. The hurricanes Frances (2004), Ivan (2004), Katrina (2005) and Sandy (2012) all gave way to higher stock prices in the months that followed.
I suspect much the same result in the aftermath of 2017's hurricane season. The overall trend in the market has been positive, supported by a strengthening economy and growing corporate profits. I believe that this trend will continue into 2018, or until we start to see advance warning signs that the economy is faltering.
Jonathan Lokken, CIMA is managing principal of Lokken Investment Group LLC in Lewes. He has been professionally managing client investments since 1997. For more information, go to www.lokkeninvest.com or call 302-645-6650.
