Tremendously wet

 By Guest Blogger Doug Rowat

Hurricane Florence barreled into the Carolinas last week causing widespread damage and significant flooding. As the category 4 hurricane approached, Donald Trump helpfully alerted the locals to the hurricane’s dangers by noting that it would be “tremendously wet”. Trump doesn’t always have a firm grasp of the obvious (you shouldn’t stare directly at the sun during an eclipse, for example) but, of course, in this instance, he was correct, with the ‘wetness’ causing some US$20–25 billion in damages.

We’re now, in fact, entering the heart of Atlantic hurricane season, which runs each year from June to November with peak season occurring right about now. And each decade the hurricanes get more plentiful and more damaging. For example, according to the North Atlantic hurricane database, or HURDAT, in the 1920s, there was only an average of 4.2 hurricanes per year. In the 2000–09 decade, by comparison, the average shot up to 7.4 per year. And virtually all of the most damaging hurricanes have occurred since 2000 (see table below).

Wrath! Every hurricane season results in ominous images in the financial press

Source: Bloomberg

Now the increase in hurricane severity and frequency is a result of global warming. But before the climate-change deniers clog the comments section, keep in mind that I don’t particularly care why they’re occurring more frequently or increasing in strength—my only concern is their possible effect on equity markets. Based on the prevalence of hurricane coverage in the financial press at this time each year (like the example above) you would think that hurricanes have enormous market impact. It’s now become an annual tradition to have a steady stream of terrifying satellite images and hurricane-tracker graphics come across the Bloomberg feed. In the end, Florence didn’t quite live up to the hype, despite the best efforts of this weather reporter:

https://www.cnn.com/videos/weather/2018/09/15/weatherman-criticized-for-being-overdramatic-hurricane-florence-lc-orig.cnn

In a few decades perhaps, more numerous and more massive hurricanes will actually influence equity markets, but for now, and historically, they matter little. Below I examine the 15 most damaging hurricanes in history and the performance of US equities three months and 1 year after. While challenging and often devastating for the areas struck, for the US stock market, hurricanes amount to sound and fury signifying nothing.

While hurricanes always make the financial news, they don’t actually impact markets

Source: Bloomberg, National Oceanic & Atmospheric Administration, Turner Investments. Total return shown. Damages not adjusted for inflation.

The reason, of course, is that as damaging as hurricanes are locally, in the context of the overall US economy, they’re a drop in the bucket. Last year’s Hurricane Harvey, for example, the costliest hurricane in US history with an estimated US$125 billion in damages, still only amounted to about 0.6% of the US$19 trillion total US economy. So, while it may suck to be invested in, say, the insurance sector after a bad hurricane season, the market quickly recognizes that the impact on the overall economy is minimal and, ironically, the hurricanes may even provide economic stimulus as the rebuilding process begins (new houses, infrastructure, cars, etc.). So, equity markets quickly brush off hurricane season focusing instead on bigger issues such as overall corporate profitability, which does, in fact, meaningfully affect market direction.

Hurricanes make for great lead stories on the nightly news, but with the exception of short-term commodity traders and isolated sub-sectors, they—no matter how “tremendously wet” and powerful—don’t affect the market.

Scary, eye-of-the-hurricane satellite images can be quite misleading.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.