Weather is the ultimate risk factor—it affects everyone, but none of us have any control over it. Mother Nature does what she does. That’s important for investors to keep in mind as the Houston region grapples with devastating flooding from Hurricane Harvey.
Some people in the markets try to anticipate and respond to a hurricane or other major event. Yet, markets often don’t do what some might expect. Crude oil prices, for example, continued to languish below $50 a barrel this week, despite some expectations Harvey would push the market higher.
“Often with things like this, it may be best to let things play out,” says JJ Kinahan, chief market strategist at TD Ameritrade. “It may not always be necessary to make the ultimate call on anything, especially with natural disasters and geopolitical events.”
Harvey provides a number of immediate lessons in how natural disasters—hurricanes, along with droughts and earthquakes in the U.S.—can carry both short-term market impact and long-term implications that might not be known for months or years.
What Industries Might Be Most Affected?
Houston is the nation’s de facto energy capital, and the storm caused the shutdown of about 15% of U.S. oil refining capacity, according to Phil Flynn, an energy analyst at Price Futures Group. Refineries that aren’t running likely don’t need incoming oil shipments, which crimps demand. This was a factor in weaker crude futures earlier in the week.
Houston, the fourth-largest U.S. metropolitan region, is more than just energy. The Port of Houston, one of the world’s busiest, handles more than 241 million tons of cargo a year.
Energy is Everywhere
Hurricanes that hit the U.S. Gulf Coast send disruptions throughout pipeline networks originating at big refining centers and other parts of the nationwide supply chain, which can be reflected in a spike in pump gasoline prices. Regular-grade gasoline on August 28 averaged $2.368 a gallon, up seven cents from a month earlier, according to AAA, the travel organization.
“A hurricane like this typically causes an increase in fuel purchases in the market and a slowdown in retail demand,” AAA spokeswoman Jeanette Casselano said in a statement. “Spikes in pump prices due to the effects of hurricanes tend to be brief but dramatic.”
Keep an eye on benchmark gasoline futures, known as RBOB, which reflect wholesale prices and can presage upswings or downswings at the pump (earlier this week, RBOB futures surged to a two-year high).
Watch Housing, Insurance
As claims are added up and the Houston region rebuilds, there’s likely to be a sizable financial impact on both of these industries. But again, it will be months before we have a firm idea. Meantime, keep an eye on U.S. housing starts and other related economic data over the next six months, Kinahan says.
We Will Recover
Major hurricanes, such as Katrina in 2005, have been followed by a dip in fourth-quarter GDP. But the economy typically bounces back from natural disasters. The stock market, too, tends to forge ahead.
While past performance doesn't guarantee future results, one item might be worth noting. Since 1954, the S&P 500 Index (SPX) has posted an average gain of 7.3% and a median gain of 8.4% in the six months following a U.S. hurricane, according to Ned Davis Research. The firm studied 44 storms.
Know What You Don’t Know
Another key takeaway: Knowing the fundamentals of any given stock is one thing; ascertaining the long-term impact of a natural disaster or geopolitical flare-up is quite another. Get in the habit, beyond the quarterly earnings reports, of finding reminders to assess your portfolio’s make-up and risk exposure.
“You should have an opinion and look at your stocks and the potential for them to be affected by something like a hurricane,” he says. “If you’re uncomfortable with your risk levels, consider taking some risk off.
Kinahan says investors shouldn't feel the need to take unnecessary risks or put on new positions ahead of a natural disaster or other potentially big event. "Markets may move a lot differently than you think they would,” he says.
All investing involves risk including the possible loss of principal.
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