Investing For Hurricanes

I usually wouldn’t write an article like this, but I’m trying something new, so let’s do this. Do hurricanes affect the stock market, and the overall U.S. economy?

How Hurricanes Affect The Stock Market

Like the vast majority of stock market moves caused by news items, the actual impact on the stock market tends to be negligible when measured over any period of more than a week or two. In other words, investors love to freak out about the news, only to forget what the story was a short time later. Weather, like hurricanes, is no different.

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Consider that an upcoming hurricane, no matter how large, has a relatively small area of impact compared to the country overall. While a hurricane might completely decimate, say, South Carolina, that impact won’t be felt in Ohio, Texas, or pretty much any other state you can name.

And, if we are being really honest, the biggest of hurricanes don’t really do much long-term damage unless accompanied by flooding. Whether it’s Hurricane Katrina, or Hurricane Sandy, the damage beyond some power failures, damaged roofs, and fallen tree branches was all done by the flooding. So, if you want to know if a hurricane will have more than a few days worth of impact, it all depends on whether or not the hurricane hits at high tide.

A hurricane at high tide, and some floodable area (like Houston, or New Orleans) equals a big deal. A hurricane at low tide hitting the East Coast tends to be a minor (to the country as a whole) event because the flooding just isn’t there other than on the coastline and a few neighborhoods.

Hurricanes and the Economy

Hurricane damage can show up in the economic numbers occasionally. Remember that government economic data is slow to come in, which means it will be several weeks after a hurricane hits before anyone can see it show up in the numbers.

Even when hurricanes do affect economic data, they tend to do so less than other, longer lasting, and bigger, weather systems. A severe cold spell across the Northeast United States is much more likely to show up in lower retail numbers than a hurricane hitting Georgia for a day or two.

Overall, unless accompanied by major flooding, hurricanes tend to be non-events with one major exception: insurance companies.

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Insurance companies are specifically designed to be able to take an event like a hurricane and keep going, but paying out settlements reduces cash on hand. Even though that is the exact business model, it can cause investors to drive the price of insurance companies down… at least until the next news item comes along.

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