Wall Street’s response
Stock market has a way of overcoming natural disasters, no matter how big or how destructive
Market barely blinks, but the gas pump does
It’s as if stock investors haven’t turned on the TV or tuned into the Weather Channel over the past week.
Unsettling images of Houston, the nation’s fourth-largest city, underwater from Hurricane Harvey’s torrential rains and estimated damage 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 110 points since Harvey barreled into Texas, and the S&P 500 has finished higher four consecutive days, nudging 0.8% higher.
AccuWeather estimates damage at $160 billion, which would make it the costliest natural disaster in U.S. history.
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% a month after Hurricane Katrina, currently the most-expensive U.S. hurricane, struck New Orleans in August 2005. It was 4% higher three months later and up 6% six months later. Similarly, after falling 3% in the month after Sandy struck New Jersey in
Wall Street also knows that economic growth will rebound during the “rebuilding, restocking and replacing” phase.
October 2012, the S&P 500 was 9% higher six months later.
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 adds, these catastrophes are viewed by investors as “nonrecurring events,” or one-time hits that won’t cause a long-lasting drag on the overall U.S. economy or earnings of U.S. companies.
Another reason the market can shrug off risks associated with violent weather has a lot to do with the size of the economy and stock market. The estimated size of the economy is between $18 trillion and $19 trillion, which means damage totaling $160 billion can be absorbed, says Karyn Cavanaugh, senior market strategist at Voya Investment Management.
Similarly, the current market value of all 500 companies in the S&P 500 is now $22.7 trillion, adds 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 economic growth will rebound during the “rebuilding, restocking and replacing ” phase. 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, sheet rock, pumps, portable generators and paints will spike. And thousands 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%. 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. Storm-stocks include: uHome improvement re
tailers. Stocks such as Home Depot and Lowe’s attract investors. Lowe’s has climbed nearly 2% and Home Depot is up 1.1% since Harvey hit Texas last Friday.
uGenerator makers. When the power goes out, stocks such as Generac, a maker of generators that can power an entire home using natural gas, and Briggs & Stratton, the engine and portable generator manufacturer, see pops in their stocks.
uInsurance stocks. Normally, shares of property and casualty insurers such as 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.