If History Is Our Guide, Harvey Will Cause Stocks To…

Word is that Hurricane Harvey will end up being the most expensive natural disaster in U.S. history. According to AccuWeather, the estimate for the full cost of the storm will approach $160 billion. To put this number in perspective, Harvey is expected to cost about the same as the combined costs of Hurricanes Katrina and Sandy.

Due to the fact that Harvey hit Houston, there will be an economic impact. Analysts are already reducing their estimates for Q3 GDP with AccuWeather suggesting that growth will be reduced by 0.8%. However, the problem is that the true impact of the storm won’t be felt for months as reports argue that Houston won’t be inhabitable for weeks, or maybe even months.

Looking at the stock market, there are a couple takeaways to be aware of. First of all, it is important to note that the sample size for major hurricanes hitting the U.S. is relatively small here. But Ned Davis Research took a look at the six costliest hurricanes that hit the U.S. (Andrew, Ivan, Katrina, Wilma, Ike, and Sandy) and measured the impact on the market.

Cutting to the chase, with the exception of Ike, which occurred in the midst of the credit crisis in September, 2008, the S&P 500 was none the worse for wear one, three, six and twelve months later.

I’ve excluded Ike from the analysis due to the fact that the stock market was in the throws of a brutal bear market when the storm hit. However, one month after the other five whopper storms hit, the S&P was up 1.2% on average, with stocks rising 4 out of 5 times. This compares favorably to the average gain for all 21-day (business days) periods at 0.7%.

Three months after the storms, stocks were up 5.4% on average versus the 2.1% for all three month periods. Six months after, the S&P was up 8.1% versus 4.2%. And the returns after twelve months were also above average at 13.3% versus 8.7%.

In looking at the chart action around major hurricanes, it is clear that stocks tend to initially pull back around the time the storms occurred. But from there, investors appear to buy the dips as the market tends to head upward once the typical bottoming process is completed.

Surprisingly, a similar pattern can be seen in the insurance stocks. As my friend and colleague Paul Schatz of Heritage Capital writes, “If history is any guide, we should see a good buying opportunity in this sector sometime in September.” (Here’s the rest of Paul’s research on the subject)

So, while the tragedies accompanying major storms are countless and our prayers are with the folks in the path of the ravaging water, we can take solace in the fact that the stock market isn’t likely to be negatively impacted for long by Harvey.

Thought For The Day:

If you’ll not settle for anything less than your best, you will be amazed at what you can accomplish in your lives. – Vince Lombardi

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Geopolitics

      2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

      3. The State of the Trump Administration

      4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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