Devastating floods struck Australia. A 7.4-magnitude earthquake hit Japan. Wildfires raged in South Korea. This year has already seen its share of natural disasters. As US hurricane and tornado seasons approach, the harsh reality is more are likely to strike—some carrying seemingly large price tags and economic fallout. However, although natural disasters cause structural damage and human suffering, Fisher Investments’ research shows they usually don’t lead to economic or market catastrophe—nor is reconstruction economic stimulus.
These events unquestionably have devastating effects on millions worldwide—but markets don’t think like humans do. They are coldhearted, processing data in real time and pricing in future expectations. To view disasters like markets, Fisher Investments suggests scaling them. The International Monetary Fund (IMF) expects global GDP to grow 4.4% in 2022. [i] In 2021, World GDP was about $94 trillion. [ii] While that is merely a forecast, it implies a disaster would have to halt more than $4.1 trillion in output to offset growth and cause contraction. But the costliest disaster in American history was August 2005’s Hurricane Katrina, which rendered damage of about $161 billion, according to the National Oceanic and Atmospheric Administration. That is big, but nowhere near a multi-trillion-dollar hit, amounting to about 1% of 2005 US GDP. US inflation-adjusted GDP grew 3.5% that year. [iii]
There isn’t much evidence natural catastrophes hurt stocks’ returns, either. In Katrina’s case, the S&P 500 was up 4.9% three months from landfall and 10.1% 12 months later. [iv] Furthermore, in August 2017, category 4 Hurricane Harvey devastated the coasts of Southeast Texas and Louisiana—a vital region for the US oil and gas industry. It was America’s second-costliest hurricane in history, with damages around $125 billion. [v] Intense flooding forced local businesses to close as they dealt with structural and inventory damages. Still, US stocks rose 9.7% from Harvey’s landfall through year end. [vi] March 2011 brought Japan’s 9.1-magnitude Great Tohoku Earthquake, which triggered a tsunami that flooded the Fukushima Daiichi nuclear reactor, causing a meltdown. This multifaceted disaster cost an estimated ~$166 billion. [vii] Extreme damages disrupted the local economy enough to spur a short Japanese recession. Japanese stocks fell -14.7% in the four days following the earthquake—a sharp correction—as investors witnessed the destruction and considered rebuilding costs. [viii] Not long after, though, global economic forces took charge and helped Japanese stocks rebound. Stocks can initially fall on sentiment, but they usually even out quickly as markets assess the damage, in Fisher Investments’ view. Again, forward-looking stocks are coldhearted. Markets digested the Tohoku news while simultaneously factoring in expected global economic growth. Sure enough, prices nearly returned to pre-quake levels within weeks.
While disasters are unlikely to drive recessions or bear markets, reconstruction isn’t likely to prove an economic boon, either. Some economists argue that, while no one wants natural disasters, the investment, jobs and increased productivity reconstruction brings are an economic positive in the longer run. Fisher Investments disagrees. Natural disasters are zero-sum, where economic gains from reconstruction equal the losses brought on by the disaster itself. They don’t amount to growth as much as replacement. Economist Frédéric Bastiat’s “broken window fallacy” illustrates this idea quite well. Bastiat explains that if someone throws a rock through a baker’s window, some townsfolk might benefit—the local glazier has new business…economic growth! However, this is mistaken. Indeed, the glazier has new business, but the baker is forced to spend money on window repairs, rather than another good or service. He may lack the funds to buy new clothing or shoes, expand the bakery or any number of countless options that generate real growth. Instead, the baker suffered a loss. The glazier won, but viewed from a macroeconomic standpoint, the effect is a wash.
In our view, investors shouldn’t let natural disasters influence portfolio decisions. Our research shows these events aren’t inherently bullish or bearish for stocks. Their damage lacks the power to trigger bear markets, and because they are zero-sum, reconstruction doesn’t drive economic growth. So, in Fisher Investments’ view, it is a mistake to let frightening news of natural disasters sway your portfolio decision-making.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
Sources:
[i] Source: International Monetary Fund (IMF), as of 03/29/2022. GDP forecast, January 2022.
[ii] Source: IMF, as of 04/08/2022. Global gross domestic product (GDP) at current prices.
[iii] Source: US Bureau of Economic Analysis, as of 03/17/2020. Estimated Hurricane Katrina damage as a percentage of 2005 US GDP; 2005 GDP growth.
[iv] Source: FactSet, as of 04/13/2022. S&P 500 total return.
[v] Source: National Oceanic and Atmospheric Administration, as of 05/09/2018. Hurricane Harvey Tropical Cyclone Report.
[vi] Source: FactSet, as of 03/29/2022. MSCI USA Index return with net dividends in USD, 08/29/2017–12/31/2017.
[vii] “Impacts of Severe Natural Catastrophes on Financial Markets,” Cambridge Centre for Risk Studies, March 2018.
[viii] Source: FactSet, as of 04/07/2022. MSCI Japan Index return with net dividends in USD, 03/11/2011–03/15/2011.