Hurricanes, superstorms, floods…in whatever form they come, they can be devastating events resulting in significant economic hardship for local communities. It is impossible to overstate the difficulty these communities are likely to endure as they work to rebuild their homes and resume living normal lives. Our thoughts go out to all of those affected.
When thinking about the economic impact of hurricanes, it is often tempting to equate the devastation on the ground with equal or greater devastation to the economy. For example, ‘experts’ who saw Irma as a nuclear hurricane ended up overestimating the potential damage by $150 billion. That’s no small margin of error, and it shows the often-huge gap between expectations and reality.
Indeed, we tend to see a recurring theme of misaligning reality and expectations in particular when it comes to hurricanes and natural disasters. Again, the toll on local communities cannot be overlooked or taken lightly. But when it comes to the broader economy and the equities markets (which reflect the broader economy), these storms tend to have very small, measured impact. For investors worried over whether Irma and Harvey could cause serious ripples in the economy and the markets, I would encourage you to be at ease – and to remember to lean on history as your guide:
|Storm||Date||Damages||S&P 500 Return (in the 1-year period that followed)|
|Hurricane Andrew||August 1992||$48 billion||+8.7%|
|Great Flood of 1993||May 1993||$36 billion||+2.3%|
|Hurricane Charley||August 2004||$21 billion||+14.2%|
|Hurricane Katrina||August 2005||$160 billion||+5.5%|
|Hurricane Ike||September 2008||$35 billion||-18.6%|
|Superstorm Sandy||September 2012||$70 billion||+18.5%|
|Hurricane Harvey/Irma||September 2017||???||???|
Do you notice a common theme in the S&P 500 return column? A whole bunch of plus signs! At the time of impact, a big storm often feels like it has the potential to sink the economy and the markets, but in recent history it has yet to actually do so. Hurricane Ike might have been the exception, but we all know that 2008’s recession and bear market were caused by a hurricane of a totally different sort.
Is It Different This Time?
Fast forward back to today, and in 2017 it appears that hurricane-related damages could exceed 1% of GDP. That would be the first time that’s ever happened, which is not insignificant. If we tack-on Irma, Jose, and whatever else may come after that, perhaps we even see costs rise to 2% of GDP. That would be historic, and with the economy barely producing “muddle-through” growth of 2%, it raises the question of whether these hurricanes can actually flatten growth for a quarter or two this time around.
The problem with that logic, however, is that calculating a 2% for 2% tradeoff is not exactly the correct way to do the math. On one hand, the 2% hit can be significant as real assets are destroyed, refineries and ports are shut down, and job losses rise. On the other hand, there will be major rebuilding efforts, significant outlays of new government spending, and boosts to consumer spending that should ultimately be additive to GDP. One tends to offset the other, and it also explains why markets tend to move past these disasters with little impact. We think the economy and markets will endure this time, too.
Bottom Line for Investors
Natural disasters are tragic by definition. But it is important for investors to separate tragedy on a local level from tragedy on a macro level. The U.S. economy is a diverse and resilient machine, and it is generally capable of absorbing shocks bigger than most would expect. So, as we move through this hurricane season, I would encourage investors not to let your expectations drift too far into tragic, big-impact territory. Instead, keep focus on the reality, which is that the economy and markets are likely strong enough to endure and move past these events, while continuing to grow. That’s our view today.