What Hurricane Irma could mean for stocks

Sam Ro
Managing Editor

Hurricane Irma has many fearing for the worst as the storm barrels towards Florida. It has already caused at least 11 deaths.

Beyond the human toll is the economic damage. Currently, estimates for the total cost of the damage run as high as $300 billion, which would be a record. This in turn is likely to have mixed results for the various companies underlying the stock market.

“Major U.S. hurricane landfalls have had less significant impact on aggregate market performance (~2% decline) given the subsequent pick-up in disaster-induced public and private spending,” JPMorgan’s Dubravko Lakos-Bujas said. “The most significant impact on equity performance is seen at the stock and sub-industry level.”

Stock market winners and losers

Some companies see a jump in costs as they repair businesses. Other companies generate more business as they supply the products and services needed in the rebuilding effort.

“The underperformance should be concentrated in insurance (e.g. property loss coverage), and companies within Hotels, Restaurants, Leisure, & Airlines (e.g. based on occupancy/traffic, rising commodity costs), Telecom and Cable (e.g. capital expenditure tied to repair and potentially lower ARPU), and Industrials (e.g. rising input costs, disruption in production and transportation) depending on geographic footprint,” Lakos-Bujas said.

“The largest outperformers include industries tied to replacing and/or repairing existing capital stock (e.g. Energy Equipment & Services, Communication Equipment, Autos), transportation and logistics (e.g. Distribution, Air Freight, Trading Companies), and construction (Basic Materials and Engineering),” he added.

Lakos-Bujas’ analysis is based on a study of 31 hurricanes since 1965, which had an aggregate cost of $520 billion. He caveated that the estimated costs of Hurricanes Harvey and Irma were by far on the high end.

The impact of hurricanes on stocks has historically been minimal.

“Based on current unofficial damage estimates for hurricanes Harvey and Irma, losses this year are expected to exceed 50% of combined costs over the last 50 years,” he said. “These outsized losses could currently drive more pronounced moves at the stock and sub-industry levels than historically.”

But for historical context, the S&P 500 (^GSPC) has seen an average decline of 2% in the week following a hurricane’s passing.

How the rebuilding will be done

Much of the backstop in the economy and the markets is based on the idea that rebuilding is stimulative. Households and businesses suddenly find themselves spending much more on what could’ve been routine maintenance.

And so, many economists say that near-term impact on GDP is net positive once the hurricanes pass. Last week, Bank of America Merrill Lynch economists went a step further and specified that “natural disasters can have a positive economic effect, if reconstruction improves upon the existing structures or facilities instead of simply restoring them to their previous state.”

But all of this assumes that there’ll be sufficient resources for these efforts. Unfortunately, there continues to be reports of labor shortages in many industries including construction.

“Labor markets were widely characterized as tight,” the Federal Reserve noted in its Beige Book. “There were reports of worker shortages in numerous industries, most notably in manufacturing and construction. Firms in the Atlanta, St. Louis, and Minneapolis Districts said that they had turned down business because they could not find the necessary workers.”

“That raised questions about the reconstruction needed for the recovery from Hurricane Harvey and maybe Irma,” UBS Art Cashin said.

Rebuidling efforts are further complicated by the continued chaos in Washington where legislators tend to politicize disasters by tethering relief funds to other political matters.

All of this will obviously become more clear once the hurricanes pass.

Sam Ro is managing editor at Yahoo Finance.

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