Natural Disasters Have Little Long-Term Effect on Markets

Despite the catastrophic damage and unimaginable loss incurred by residents of the Gulf Coast, history shows that natural disasters have little effect on broad financial markets over the long term.  While certain industries such as insurance, transportation and other regional businesses are impacted significantly by major natural disasters, the broad financial markets recover swiftly after an initial shock.  The economic environment, monetary policy and technical trends are much more important to the long-term direction of stock prices. 

I have highlighted four of the most devastating natural disasters of the past century and the financial market’s reaction.  Two of the four markets bounced back swiftly from impulsive declines and the other two never declined significantly.  However, each market saw a different long-term outcome, indicating that the market’s ultimate trend was probably based on a multitude of factors not related to the natural disaster.   

2004 Indian Ocean Earthquake and Tsunami

On December 26, 2004, the fourth largest earthquake in the 20th century  caused a tsunami that stretched from South Asia to East Africa.  The tidal wave killed over 200,000 people and displacing 1.1 million others.  The estimated $2 billion in damage caused by the tsunami does not convey the significant human loss. 

Financial markets in the Asia Pacific region were brazen in their reaction to the natural disaster.   From Indonesia to India, stock prices closed higher in the days and weeks after the tsunami.  In fact, the Jakarta market hardly reacted at all, despite Indonesia being one of the hardest hit nations with an estimated 120,000 people killed.  The Jakarta market, which was in a powerful bull trend as shown by the rising 50 and 200 day moving averages, rose 15% over the next several months following the disaster. 

1992 Hurricane Andrew

On August 22nd, 1992, Hurricane Andrew made landfall in southern Florida, causing 15 deaths, $30-billion in property damage and leaving more than 250,000 homeless.  Until Hurricane Katrina, it was billed as the most expensive natural disaster in US history. 

While numerous insurance companies declared bankruptcy following Hurricane Andrew, the Dow Jones Industrial Average fell only 2.2% during the two days following the hurricane’s landfall.  The Dow made a second bottom in October, 1992 and continued its steady climb throughout 1993.    The Index rose 14% in 1993 until the Federal Reserve began a tightening cycle in 1994.   

1969 Hurricane Camille

On August 17, 1969, Hurricane Camille struck the Gulf Coast, causing over 250 deaths and an estimated $4.2 billion in damage (1969 dollars).  The parallels between Hurricane Camille and Katrina are eerie – both were category five hurricanes before landfall, both caused hundreds of deaths in Mississippi and Louisianan, and both ravaged the Gulf Coast economic infrastructure.   

"For survivors, chaos reigned along the coast. There was no gas, electricity or drinking water. Roads were impassable, railroads washed out, telephone lines down," wrote Time magazine in August 1969.

Despite the destruction, the Dow Jones Industrial Average actually closed higher the day and week of the  hurricane.  The market had been falling for the previous three months because investors feared President Nixon would institute price controls to alleviate rising inflation.  While the Dow Jones Industrial Average began a brief recovery several months after Camille, it fell again towards the end of 1969 as inflation and interest rates continued to rise. 

1906 San Francisco Earthquake and Fire

An earthquake registering 7.9 on the Richter scale struck California on April 18th, 1906.  The earthquake and resultant fire, which engulfed much of San Francisco, caused over 600 deaths and an estimated $400 million in property damage (1906 dollars).  The combined disasters essentially destroyed a city of 400,000 inhabitants (versus a total US population of 85 million at the time). 

The Dow Jones Industrial Average reacted rather slowly to the news because the most significant damage was caused by fires after the earthquake.  Still, the Dow Jones only fell 5% during the next two weeks and recovered rapidly after the decline.  The index made a second bottom in July and essentially traded sideways for the remainder of 1906. 

Not until March 1907, did the market make a dramatic move, when the Dow Jones plunged in the "Panic of 1907."  However, the crash was caused by the deflating of copper stocks and the resultant financial panic, not the devastating earthquake a year before.

Markets Rebound In The Short Term

Despite swift downdrafts, financial markets often rebound quickly from major natural disasters.  Several reasons account for such rapid bounces.  First, large corporations, whose stocks make up the major indexes, are usually insured against business interruption and have the wherewithal to resume operations quickly.  While the companies might miss a quarterly profit estimate, the long-term financial impact to large companies is miniscule.  Second, governments and central banks often inject liquidity into the financial system to provide money for the rebuilding effort.  Third, the short term economic disruption caused by a natural disaster is often offset by the long term economic activity generated from reconstruction.  And finally and unfortunately,  the majority of the damage is often incurred in poor areas, which have little economic influence to begin with, as was the case in the 2004 Indian Ocean tsunami.

Historically, damage resulting from major earthquakes, hurricanes or tsunamis has had little effect on broader financial markets over the long-term.  While today’s market might be slightly different because of the nationwide spike in gasoline prices, the lesson from history is fairly clear.  No matter how severe the destruction, investors are better off understanding economic fundamentals, monetary policy and technical trends than reacting to the negative short-term fallout from natural disasters.