Stocks shrug off hurricane’s damage
While storm hits Houston, Wall Street sees market rise
It’s as if stock investors haven’t turned on the TV or tuned into the Weather Channel over the past week.
The unsettling images of Houston, the nation’s fourthlargest city, underwater from Hurricane Harvey’s torrential rains and estimated damages of $160 billion have not been enough to cause stock prices to sink.
Both the Dow Jones industrial average and benchmark Standard & Poor’s 500 stock index have risen in value at the same time the storm ravaged southeast Texas, and more recently southwest Louisiana. The Dow has climbed nearly 174 points since Harvey barreled into Texas and the S&P 500 has finished higher five straight days, gaining 1.4 percent during that time. AccuWeather estimates damages at $160 billion, which would make the storm the costliest natural disaster in U.S. histo-ry.
While a rising stock market during a hurricane of this epic size might seem counterintuitive, stocks have a long history of weathering storms, no matter how big or how destructive.
The S&P 500, for example, was down only 0.2 percent a month after Hurricane Katrina, currently the most-expensive U.S. hurricane, struck New Orleans in August 2005. It was 4 percent higher three months later and up 6 percent six months later. Similarly, after falling 3 percent in the month after Sandy struck New Jersey in October 2012, the S&P 500 was 9 percent higher six months later.
What keeps the stock market rising when disastrous weather strikes?
Despite the human suffering, “natural disasters often have substantive local impact but less of a national effect,” Tobias
Levkovich, chief U.S. equity strategist at Citigroup in New York, wrote in a report. What’s more, he added, these catastrophes are viewed by investors as “nonrecurring events,” or one-time hits that won’t cause a longlasting drag on the overall U.S. economy or earnings of U.S. companies.
Another reason the market can shrug off the risks associated with violent weather has a lot to do with the huge size of the economy and stock market. The estimated size of
the economy is between $18 trillion and $19 trillion, which means damages totaling $160 billion can be absorbed, said Karyn Cavanaugh, senior market strategist at Voya Investment Management.
Similarly, the market value of all companies in the S&P 500 was approaching $23 trillion last week, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Large companies can survive disruptions in regional sales and profits.
Wall Street also knows that economic growth will rebound during the “rebuilding, restocking and replacing” phase.
“There will be a bounceback,” Cavanaugh said.
Cars totaled by water damage will need to be replaced. Homes will have to be rebuilt and repaired.
That means sales of roofing materials, lumber, windows, sheetrock, pumps, portable generators and paints will spike. And thousands of Americans will be put back to work.
Harvey also hit at a time of strength for both the broader U.S. economy and foreign economies. The U.S. government upped its estimate for second quarter GDP Wednesday to 3 percent. Plus, jobs remain plentiful and consumer confidence is near its highest level since the 2008 financial crisis. That strength provides a buffer to the fallout caused by Harvey.
“The bigger national and global trends will eclipse a big local event like Harvey,” Cavanaugh said.
Still, Hurricane Harvey has cast a spotlight on “storm stocks,” or companies whose shares benefit from the cleanup and rebuilding process, and those that could suffer financial harm, such as insurers. Storm-stocks include: » Home improvement retailers. Stocks including Home Depot and Lowe’s, which sell home construction materials, pumps, fans, dehumidifiers, appliances and other must-haves needed to rebuild after storm damage, attract investors. Lowe’s has climbed nearly 2 percent and Home Depot is up 1.35 percent since Harvey hit Texas Aug. 25. Both saw sizable gains in the three- and six-month periods following Sandy and Katrina.
» Generator makers. When the power goes out, stocks like Waukesha-based Generac, a maker of generators that can power up an entire home using natural gas, and Briggs & Stratton, the Wauwatosa-based engine and portable generator manufacturer, see pops in their stocks. Generac shares, which have risen 5.4 percent in the current storm, were up nearly 38 percent a month after Sandy.
» Insurance stocks. Normally, shares of property and casualty insurers like Allstate, Travelers and Chubb take a big hit following hurricanes. But losses associated with Harvey are seen as being smaller as most of the damage is due to flooding, which is not covered under normal homeowners’ policies. Shares of the three insurers are down between 1.5 percent and 5 percent since Harvey’s landfall. The federal government’s flood insurance program will be on the hook for the bulk of the water-related losses, said Randy Frederick, vice president of trading and derivatives at Charles Schwab.
While history shows the resilience of stocks during natural disasters, investors need to be “prepared for the potential for greater magnitude losses” for the economy and stock market, Frederick said. “The losses could be larger and the rebuilding could drag on longer than people expect,” he said.