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Fires, Hurricanes, and Earthquakes: What Disasters Mean For Markets

Fires, Hurricanes, and Earthquakes: What Disasters Mean For Markets

Key Points
  • 2017 is likely to rank as the most costly year ever for natural disasters.

  • From a purely economic perspective—where analysis replaces emotion—disasters tend to spur economic growth over the short and long-term despite the widespread destruction they leave behind.

  • Stock market losses associated with past major disasters were typically short-lived.

Few regions of the world have escaped the wrath of Mother Nature this year. While every year has its share of natural disasters, this year has seen an extraordinary number of them. The raging fires in California and the strongest ever Atlantic hurricane hitting Ireland in recent days follow the succession of hurricanes and typhoons slamming into U.S. and Asian shores in recent months, the September earthquake in Mexico, and series of landslides in Asia and Latin America. 2017 is likely to rank as the most costly year ever for natural disasters.

2017 likely the most costly year ever for natural disasters

Overall Losses for Global Disasters

Inflation adjusted via country-specific consumer price index and consideration for exchange rate fluctuations between local currency and US dollars.
2017 estimate includes only AccuWeather estimates of $290 billion for Hurricane Harvey and Irma and $85 billion for the California fires.
Source: Charles Schwab, Insurance Information Institute as of 10/15/2017.

The human toll of these disasters is immeasurable; the lost lives and homes leave scars that can never be fully healed. However, from a purely economic perspective—where analysis replaces emotion—disasters tend to spur economic growth over the short and long-term despite the widespread destruction they leave behind. The counter-intuitive outcome of stronger growth based on analysis is important for investors to consider as the news focuses primarily on the losses.

Most costly global disasters

Most Costly Global Disasters

Losses are in billions of US dollars.
Source: Insurance Information Institute, Munich Re, Geo Risks Research, NatCatSERVICE as of February 2017.

An example of the short-term growth boost can see be seen in the most costly disaster of all time. On March 11, 2011, a 9.0 magnitude earthquake and powerful tsunami wave of over 100 feet struck Japan's northeastern shoreline. The waves damaged the Fukushima nuclear power plant creating radioactive leaks ranking a level seven on the International Nuclear Event Scale, the same level as the Chernobyl nuclear disaster. Prior to the disaster, Japan’s economy had slipped into recession in the fourth quarter of 2010. The response to the disaster that took place at the end of the first quarter of 2011 helped Japan’s economy rebound with the strongest quarterly growth rate Japan had seen in decades in the third quarter of 2011. While it has only been six years since the disaster, GDP growth in Japan has since been above the 20-year average that preceded it.

There are many other examples of a boost to economic growth in the aftermath of a disaster, including those in China and the United States.

  • The earthquake that struck China in May 2008 left widespread devastation and killed over 80,000 people. While it is hard to verify the actual impact on growth during a year the world fell into the Great Recession, the world’s second largest economy grew at a high single-digit rate during the year following the disaster. China’s infrastructure spending soared during the four quarters following the disaster, contributing three percentage points to GDP growth in 2008 and 2009, according to China’s statistics bureau.
  • In the U.S., the new investment and rebuilding that followed the California Northridge earthquake that struck in January 1994 helped pull the state out of a three year recession.

Since GDP measures production, not wealth, the losses do not act as an economic drag, while the rebuilding provides a short-term boost to the economy during the following quarters. More importantly, the evidence reveals that disasters force countries to invest in new and more efficient infrastructure, replacing what had become outdated. In fact, economic analysis has shown that countries with more disasters grow faster over the long run (Do Natural Disasters Promote Long-Run Growth? Mark Skidmore, Hideki Toya. Journal of Economic Inquiry. pgs 664-678. October 2002). As it rebuilds, the economy becomes more productive over the long-term than it was before, boosting the GDP growth rate.

While no one would wish for a disaster, we can take some comfort in knowing that they can help foster future economic growth—rather than weaken it. This may explain the lack of any measurable negative market reaction to this year’s disasters—and the fact that losses associated with past major disasters were typically short-lived, as you can see in the chart below.

Markets tend to recover quickly following disasters

Number of Days to Recover From Disasters

Source: Charles Schwab, Bloomberg data as of 10/15/2017. Indexes used by country: Philippines Stock Exchange Index, S&P 500 Index, Shanghai Stock Exchange Composite index, Nikkei 225 index, Jakarta Stock Price Index, Borsa Instanbul 100 Index, Taiwan Stock Exchange Weighted Index, FTSE MIB Index, CAC 40 Index, Santiago Stock Exchange IPSA Index, New Zealand Exchange Gross Index, Argentina Merval Index, Bangkok SET Index, Russian Trading System Cash Index, Mexican IPC index.

Third quarter earnings reports will reflect the temporary impact of recent disasters. Analysts have made downward revisions to third quarter earnings per share estimates for companies in the insurance, energy, and chemicals industries affected by the hurricanes. However, profits are expected to rebound in the fourth quarter.

History shows that investors don’t need to fear losses in their portfolios from natural disasters. But with the appearance of a rising incidence of natural disasters it may make sense to have a financial plan that can account for the impact of a natural disaster that may directly affect your family.

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Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The Philippine Stock Exchange PSEi Index is a capitalization-weighted index composed of stocks representative of the Industrial, Properties, Services, Holding Firms, Financial and Mining & Oil Sectors of the PSE.

Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

The Jakarta Stock Price Index is a modified capitalization-weighted index of all stocks listed on the regular board of the Indonesia Stock Exchange.

The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts. The constituents of the BIST National 100 Index are selected on the basis of pre-determined criteria directed for the companies to be included in the indices.

The TWSE, or TAIEX, Index is capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.

The Index consists of the 40 most liquid and capitalized stocks listed on the Borsa Italiana.

The CAC 40, the most widely-used indicator of the Paris market, reflects the performance of the 40 largest equities listed in France, measured by free-float market-capitalization and liquidity.

The IPSA Index is a Total Return Index and is composed of the 40 stocks with the highest average annual trading volume in the Santiago Stock Exchange (Bolsa de Comercio de Santiago).

The New Zealand Exchange 50 Gross Index is a modified market capitalization weighted index. This index consists of the top 50 companies by free float adjusted market capitalization that are listed on the New Zealand Exchange Limited.

The Argentina Merval Index, a basket weighted index, is the market value of a stock portfolio, selected according to participation in the Buenos Aires Stock Exchange, number of transactions of the past 6 months and trading value.

The Bangkok SET Index is a capitalization-weighted index of stocks traded on the Stock Exchange of Thailand.

RTS Index is cap-weighted composite index calculated based on prices of the 50 most liquid Russian stocks of the largest and dynamically developing Russian issuers presented on the Moscow Exchange.

The S&P/BMV IPC seeks to measure the performance of the largest and most liquid stocks listed on the Bolsa Mexicana de Valores. The index is designed to provide a broad, representative, yet easily replicable index covering the Mexican equities market.

(1017-7FUB)

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