3 Ways How Hurricanes Can Dramatically Affect The Stock Market

Three Ways Hurricanes Affect the Stock Market

Hurricanes can have a devastating impact on life and property, but sometimes their impact is felt in the stock market too.
Not all disasters truly have an adverse impact on the stock market. A recent example: the Dow Jones Industrial Average declined just 0.1% after the weekend following Hurricane Harvey, and rose slightly initially. The stock market sometimes reacts perversely to extreme events like this, as cold and calculating investors make shrewd bets.
In the event of a hurricane, stocks are expected to tremble, and such a situation can influence the prices of market traded commodities.

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Source: NBC News

Here are a few ways a hurricane can potentially affect the stock market.

1. Negative Growth

Even though there hasn’t been a final assessment of the damages resulting from Hurricane Harvey, analysts estimate the final figure will be between $100 and $200 billion.
Goldman Sachs recently cut its 3Q GDP growth outlook by a stunning 0.8%, from 2.8% to 2.0%. An analyst from the firm indicated that much of the impact would be felt in consumer spending, housing, insurance, and energy sectors.

2. Rising Prices

The Dow Jones Industrial Average went up 1.3% at the close of the market just 11 days after Hurricane Katrina. Just a day before Katrina struck, the Dow closed at 10,450 meaning that it went up by 139 points in the middle of the storm. Who would have imagined?
After a devastating hurricane, analysts worry about corporate earnings diving, except in the energy and construction sectors.
Still, extreme weather events such as hurricanes often leave market analysts and investors involved in the oil and gas industry on edge. The refineries in Texas may have been shut down in the wake of Harvey, and we can expect energy prices to go up. Following Hurricane Katrina, gas prices spiked as people started to panic and preemptively load up on supplies.

3. Falling Prices

The devastation caused by floods on property causes a lot of distress to casualty insurers such as Travelers and Chubb. As you can imagine, a significant portion of the rebuilding costs following a hurricane can fall on the shoulders of insurance companies.
What is interesting is that following Katrina, insurer’s stocks held up quite robustly, falling less than 1% in the week following the storm. Reinsurers, who provide insurance to insurers, tend to be the ones that get hurt in times like this.
Insurance companies like to hedge their bets on extreme events by using reinsurers, who then have to pay out the bulk of the claims. Expect reinsurers to be hit harder than insurance companies. Hedge funds with large stakes in reinsurance businesses can expect to be affected as well.

Investment portfolios have soared globally over the last decade, and it’s important to underline the impact a natural disaster like a hurricane can have on such investments. Taking a cue from history, we know that natural disasters can be both bad and good for business depending on which side of the divide you find yourself.

For the most part, natural disasters tend not to affect the overall market too much. Of the 15 most destructive hurricanes since 2000, only four of them occurred at stock market inflection points (points where the stock market changed its trend), and that was likely just coincidence.

Keep watching closely and brace yourself for the unexpected!

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