For a week that began with a hydrogen bomb and ended with a storm that a Florida mayor warns is “nuclear,” you’d be hard pressed to tell anything was wrong from the surface of stocks.
While swings proliferated among industries and the country braced for devastation, the S&P 500 was its typical imperturbable self, closing the four-day stretch with a decline of about 0.5 percent. Traders said there was little to do but sit as the Category 4 hurricane tacked toward Florida.
“Keep your feet on the ground,” 80-year-old Marshall Front advised investors from Chicago, where he manages Front Barnett Associates. “The obvious personal security issues are always on people’s minds, but from an investor’s standpoint, you’re better off doing nothing.”
Trading this week has already showed the hazards of too much certainty in an unsettled world. Anyone who sold into the 1.2 percent decline that happened Tuesday following North Korea’s nuclear test may have regretted it Wednesday, as the S&P 500 made most of it back. The rebound came as President Donald Trump struck a deal with Democrats to extend the debt ceiling.
Index moves were negligible Thursday and Friday as Irma pushed through the Caribbean with winds of up to 185 miles per hour.
“That the S&P 500 hasn’t really done anything this week shows us people are probably waiting to react,” said Frank Cappelleri, senior equity trader at Instinet LLC in New York. “Despite the various headlines this whole year, nothing has really moved the needle, so anticipating a move is a tough chore.”
Phil Orlando, chief equity strategist at Federated Investors, is taking no chances. He trimmed his equities exposure a few weeks ago in part because he anticipated an active hurricane season. The 59-year-old investor sees a 3 to 5 percent decline in the S&P 500 following hurricane Irma but says the estimates can change as Irma hits.
‘Not Worth the Risk’
“Any negativity in the stock market is going to manifest itself in three to four weeks,” he said. “If the worst estimates end up happening, Irma becomes the worst storm in history by a multiple of two. It’s not worth the risk.”
As the country prepared for the worst, the calculus for investors was, as always, separate and distinct from the potential human toll. History shows that the market is not usually fazed by natural disasters partly due to the subsequent pickups in spending. JPMorgan Chase & Co. studied stocks during the 15 biggest hurricanes since 1965 and found that the S&P 500 fell an average 0.3 percent during the two weeks surrounding the events.
On the other hand, ignoring major storms is obviously a mistake at the level of individual stocks. In the five most destructive ones, logistics companies and producers of construction materials led the market with shares jumping more than 2.9 percent while insurance, media and airline stocks were among the worst performers.
Stocks followed a similar playbook this time.
- Banks and insurers bore the brunt of the selling over the week as bond yields fell amid speculation that the Federal Reserve may hold off rate hikes due in part to the storm.
- Damages could easily top $135 billion in Florida, with other economic losses pushing the price tag as high as $200 billion, according to Chuck Watson, a Savannah, Georgia-based disaster modeler with Enki Research.
- “Insurers tend to overreact on the downside, and you often see their market capitalization cut by the amount that is as much as three times the worst estimate of the losses,” said Enrique Diaz-Alvarez, the chief risk officer at Ebury Partners who has been managing risk for 15 years. “I don’t see any significant risk for the stock market or the economy. We are still taking about a small fraction of a large market.”
- Airlines and leisure stocks were also under pressure as hurricane Irma threatens Florida tourism.
- Carriers have canceled about 4,000 flights ahead of Irma as of Thursday and Walt Disney Co. said its Disney World property has already seen cancellations.
- Cruise lines, especially those that operate out of the Miami port, the world’s busiest cruise port last year, are already seeing fallout as companies from Royal Caribbean Cruises Ltd. to Carnival Corp. called off sailings.
- Countering these losses were Home Depot Inc. and Lowe’s Cos. Their shares rallied on expectation that demand for home improvement products will rise.
- Energy stocks advanced for a third week as the year’s worst performing industry recovered. While Hurricane Harvey smashed ashore in Texas two weeks ago, knocking offline almost a quarter of U.S. oil refining capacity, the arrival of Irma would mean falling demand for gasoline and other transportation fuels across much of the southeastern U.S.
The hurricane-related gyrations create opportunities for traders, but Walter “Bucky” Hellwig at BB&T Wealth Management said he’s staying put.
“Some high frequency traders can make some money buying some of building materials stocks and then kicking them out, but we look at at long-term economic drivers,” Hellwig, a senior vice president who helps manage $17 billion at BB&T in Birmingham, Alabama. “As far as we’ve come this hurricane season relative to the market and the economy, it’s not a long-term event.”
— With assistance by Lily Katz, Janet Freund, and Esha Dey