Will stocks be blown away by Hurricane Sandy?

Will stocks be blown away by Hurricane Sandy?

As Hurricane Sandy wreaks havoc across the east coast of the United States, many might be wondering what impact, if any, it will have on the U.S. stock market when it will likely resume trading on Wednesday. We have investigated its impact by looking at the historical data of past natural disasters and the resulting effects on GDP and stock market performance.

What impact will the storm have on the U.S. economy?

In 2005, Hurricane Katrina cost about 0.9% of annual U.S. GDP, which equates to about $US108 billion in damages. In 2011, Hurricane Irene, while only half the size of Hurricane Sandy, still managed to cause $US19 billion in damages to the U.S. economy. As Hurricane Sandy, the largest ever recorded Atlantic tropical storm, bears down on the east coast of America, what impact will it have on the U.S. economy and financial markets after the dust settles?

While Hurricane Sandy is only a low intensity storm, its sheer scale is causing very low atmospheric pressure, leading to highly damaging storm surges and heavy flooding. Aside from direct damage caused by high winds and storm surges, the shutting down of Wall Street, the economic centre of the world, for two whole trading days will also add to the loss of annual GDP. Although at this stage it’s nearly impossible to gauge the level of storm surge damage, we can accurately forecast the cost of NYC shutting down. Every day, the New York City economy produces approximately $US3.5 billion in gross metropolitan product. Some analysts are already forecasting Sandy will cost anywhere between $US10 to $US20 billion dollars, but at this early stage it’s still far too difficult to estimate.

What impact will Hurricane Sandy have on U.S. stocks when they reopen on Wednesday?

Even after Hurricane Katrina, the most damaging storm in history, dissipated, the S&P 500 Index rallied 2.73% over the subsequent seven trading sessions. However, a month and a half later, even amid a strengthening U.S. economy, the S&P 500 Index was down 2.63%. When examining other historically significant natural disasters, and according to research conducted, there isn’t statistically significant enough evidence to actually say that natural disasters positively or negatively impact stock market returns.  But using Hurricane Katrina as evidence, if Hurricane Sandy causes anything over $US50 billion in damage to the U.S. economy, we may see the U.S. market negatively impacted to some extent. In particular, insurers, directly impacted discretionary retailers, and energy companies may incur most of the damage, while building and non-discretionary retailers may benefit.

Should market participants be concerned?

While there is growing concern and interest in how the U.S. market will react to Hurricane Sandy when it likely reopens on Wednesday, historical evidence suggests there is no need for concern. However, with the storm far from over, it’s far too early to gauge what level of damage the storm might cause.  And with early estimates of about $US20 billion in economic damages, we’d need to see somewhere near Katrina type inflicted damages of $US108 billion to start getting too concerned, which is unlikely.

How should investors prepare for this event?

U.S. markets will likely reopen on Wednesday more concerned about the upcoming U.S. presidential election, a looming fiscal cliff, and ongoing woes in the euro-zone. Continue to keep an eye on how damaging Hurricane Sandy is, and if it’s around $US20 to $US40 billion, there will be minimal impact on stocks. So Rivkin Global, our global advice and dealing product, will continue to take short-term views on how individual instruments will change in price. The only real impact the storms have on Rivkin Global is that is restricts our trading in U.S. listed instruments. Meanwhile, Rivkin Local, which earns its steady income returns from ASX-listed, strategic model portfolios, and short-term returns from corporate events, will continue business as usual.

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