Whether you realize it or not, you witnessed history less than two weeks ago.
After forming over the Lesser Antilles on Aug. 24, Hurricane Dorian would go on to become one of the strongest storms ever measured in the Atlantic. When it struck the Bahamas on Sept. 1, it had peak sustained wind speeds of 185 mph, making it the strongest hurricane in more than eight decades to hit the Bahamas. It also tied for the second strongest on record in terms of one-minute sustained wind speed.
It absolutely ravaged the island of Grand Bahama, took aim at Florida and the Carolinas in the U.S., and left behind an official death toll of 45 in the Bahamas as of Monday, Sept. 9. But keep in mind that local newspapers in the Bahamas are claiming death tolls in the thousands, suggesting that this "official" total may head significantly higher.
In addition to the priceless loss of lives, hurricanes can impact businesses, both big and small, in the areas they strike. What impact might the U.S. economy and stock market feel from Dorian's romp through the Atlantic and near the Eastern seaboard of the United States? Let's take a closer look by taking a walk down memory lane.
How much do hurricanes really impact the U.S. economy and stock market?
In terms of lives lost, Dorian was a monster. But in relation to monetary and productivity losses, Dorian's financial hit is unlikely to be as extreme.
In the Caribbean, risk-modeling firm AIR Worldwide has estimated that insurance companies will be on the hook for between $1.5 billion and $3 billion in payouts. Had Dorian taken more direct aim at the U.S., much in the same way Hurricane's Katrina and Andrew did in 2005 and 1992, respectively, the damage figures and claim amounts would have been significantly higher.
Within the U.S., data analytics firm Planalytics estimates that Dorian's impact will reduce consumer spending by as much as $1.5 billion in the Southeastern states impacted by the storm. Occurring right in the midst of back-to-school shopping season, Planalytics foresees a 25% decline in foot traffic at apparel stores, a 14% drop-off in restaurant traffic, and a 32% dip in outlet center foot traffic, according to CNBC.
But while short-term economic and productivity losses are exceptionally common following a hurricane of Dorian's magnitude, rarely -- if ever -- do the economic losses stemming from a hurricane translate into long-term concerns for the U.S. economy.
Looking back on Hurricane Katrina in 2005, it led to total damages and losses totaling about $160 billion, according to estimates from the National Oceanic and Atmospheric Administration. Per the St. Louis Federal Reserve, this represented about 1% of real gross domestic product in the United States in 2005. There were also notable reductions in oil and gas production, as well as broader industrial production, because of Katrina.
But the St. Louis Federal Reserve also notes that while hurricanes can have negative short-term impacts on key macroeconomic variables, these effects are short-lived, with the rebuilding effort reversing these adverse effects.
When comparing the more than one dozen hurricanes that have made landfall in the U.S. since 2000 to the performance of the stock market in the immediate wake of those landfalls, we also find little in the way of parallels. In other words, major macroeconomic issues took far greater precedence in driving the market higher or lower, with the monetary impact from a hurricane being almost entirely overlooked.
Yes, certain stocks can benefit from hurricanes
Nevertheless, the preparation leading up to a hurricane making landfall, as well as the cleanup and rebuilding process following a hurricane, can create opportunities for investors to thrive and businesses to see a pickup in demand.
Chances are that if you've watched news coverage on an approaching hurricane, you've been shown video of empty grocery store shelves and plywood, generators, and other tools being purchased en masse at home-improvement stores. While the former receives an extremely short-term benefit, companies like Home Depot (NYSE:HD) and Lowe's can realize modest long-term effects from a major hurricane hitting the United States. That's because Home Depot and Lowe's cater to both the do-it-yourself homeowner tackling repairs on their own, as well as professional contractors who will be rebuilding damaged homes and new homes in affected areas.
Home Depot has done a particularly good job of preparing for natural disasters, including hurricanes. Following Hurricane Andrew's devastating landfall in Florida 27 years ago, Home Depot set about creating a distribution network of hurricane-specific goods in coastal areas of the U.S. prone to hurricanes. Today, it has four such distribution hubs (Baytown, Texas; Lakeland, Florida; Cranbury, New Jersey; and Atlanta, Georgia), with improved inventory tracking technology helping store managers and these hubs in the event of a natural disaster.
An even more direct player that tends to benefit in the wake of hurricanes is Clean Harbors (NYSE:CLH). This is a company whose purpose is to offer disaster preparedness and cleanup following hurricanes, oil spills, and other types of disasters (both natural and man-made).
Understand, though, that Clean Harbors' sales and profitability aren't going to simply soar as soon as a hurricane hits land. The company's immediate response post-hurricane (setting up relief centers and providing non-hazardous cleanup) tends to be of the low-margin variety. It's the longer-term cleanup and rebuilding efforts following a devastating hurricane or natural disaster that can allow Clean Harbors to shine.
Don't forget about insurers
On the other hand, hurricanes create losers, too, and the insurance industry is the most front-and-center punching bag following pretty much any major natural disaster. In 2017, for example, $80 billion in economic damage caused by Hurricanes Harvey, Irma, and Maria, was insured, leading to depressed operating results for property and casualty insurers that year.
But the thing you have to realize about insurance companies is that they prepare for economic disasters. Should a hurricane hit land or another natural disaster strike, insurers have justification to raise premiums across the board to recoup what outflows they may experience from claims. Even during periods of low claim activity, insurers are merely biding their time and building their reserves as they await the next disaster. The point is that the insurance business, while relatively boring, is generally a moneymaking machine with exceptional pricing power. Hurricanes only help to bolster that pricing power for insurers.
Take Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) as a perfect example. Even though Warren Buffett's Berkshire is a conglomerate, it's the owner of GEICO, one of the largest property and casualty underwriters in the country, as well as reinsurance company General Re. When reporting its third-quarter operating results in 2017 following Hurricanes Harvey, Irma, and Maria, as well as a large earthquake in Mexico City, Berkshire's insurance subsidiaries recorded about $3 billion in losses, with GEICO and General Re responsible for $920 million in operating losses.
Now, fast-forward to 2019. During the second quarter, Berkshire Hathaway saw the combo of GEICO and General Re underwrite $3.4 billion more in policies than they did in Q3 2017, with the duo combining for an operating profit of $289 million. Insurers are moneymaking machines, which is why Buffett seeks them out.
There are always going to be natural disasters. But don't discount larger insurers' ability to raise premiums and be well prepared for such events. Should well-branded insurers stumble from hurricane-related losses, consider them perhaps the most intriguing potential buy of all.