If History Is Our Guide, What Will Harvey Do To Stocks?

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.