The 2017 Atlantic hurricane season has been a highly active one, with multiple storms wreaking havoc on the Caribbean and Gulf of Mexico. In addition to the loss of life, the trail of devastation caused hundreds of billions of dollars in damages. With cleanup efforts underway, investors are reminded that their portfolio and the economy at large are often at the mercy of Mother Nature.
Although hurricanes are generally unpredictable, the Atlantic season officially runs from June 1 through November 30, with the months of August and September seeing the most activity. Since Hurricane Sandy plowed through New York City in 2012, causing $71.4 billion in damage, the Atlantic storm season has been relatively tame. That is, until 2017.
This past August, Hurricane Harvey made landfall in Texas as a category 4 storm. Harvey flooded tens of thousands of basements and resulted in the deaths of at least 77 people. Preliminary estimates of Harvey’s costs range from $70 billion to $190 billion, putting it among the most expensive tropical storms of all time.
Just a few weeks later, Irma crashed into the Florida shoreline as the strongest hurricane since 2005’s Wilma. Despite causing tens of billions of dollars in damage, Irma’s westward shift spared Miami-Dade and Marco Island “astronomical” damage.
Hurricane Katrina is widely regarded as the most devastating Atlantic storm in U.S.-recorded history. The 2005 storm caused $108 billion in damages and up to 1,836 fatalities. The storm was a wakeup call for governments, businesses and the insurance sector that existing relief efforts simply aren’t good enough.
The economic toll of major weather patterns is clearly evident when we look at metrics such as gross domestic product (GDP) and employment. For example, Hurricane Katrina hit 3% of the U.S. economy, shaving a slither off GDP.
Hurricane Harvey also boosted U.S. jobless claims to more than two-year highs. Claims spiked 62,000 to a seasonally adjusted 298,000 for the week ended September 2. That was the biggest one-week surge since November 2012.
The severity of the 2017 season is attributed to multiple forces, including a strong West African monsoon and El Niño being stuck in neutral. Predictions based on warming indicate that the average intensity of tropical storms could get more intense in the future. Since warmer air holds more water vapor, it’s possible that individual hurricanes will result in more precipitation moving forward.
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Industries You Can Go Long During Hurricane Season
Although there is no discounting the devastating impact of violent weather patterns, certain sectors of the stock market perform better when these events occur. Businesses tied to house repair, roof repair and construction typically outperform during these weather events. This is especially true for companies with exposure to the countries or regions impacted by the weather pattern.
Ahead of Hurricane Irma, building materials manufacturer and distributor USG Corp reported sharp gains. This was also the case for roofing material distributor Beacon Roofing Supply Inc. and building products manufacturer Louisiana-Pacific Corp.
Home improvement giant and Dow 30 blue-chip Home Depot Inc. (HD ) also posted firm gains in the lead up to the storm. Lowe’s (LOW ) was also among the top gainers as investors anticipated widescale cleanup efforts.
Industries You Can Short During Hurricane Season
As Hurricane Irma demonstrated, insurance stocks are the most vulnerable to natural disasters. The industry as a whole buckled in the days leading up to Irma making landfall in September. This was especially the case for state and local insurers. Anticipation for Irma triggered a precipitous drop in Homeowners Choice, Universal Insurance Holdings (UVE ), and Heritage Insurance Holdings (HRTG ). Reinsurers like XL Capital (XL ) and Everest (RE ) also contributed to the sharp losses.
To compare insurance stocks from a dividend perspective, check out the Property & Casualty Insurance category on Dividend.com.
Energy stocks ranging from producers to pipeline companies are also vulnerable to hurricanes. In the case of Irma, energy companies Pioneer Natural Resources (PXD ), Apache Corporation (APA ) and Anadarko Petroleum (APC ) faced selling pressure.
These examples clearly demonstrate that insurance and energy stocks should be on every short-seller’s list during hurricane season.
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The Bottom Line
Preparing for the worst of hurricane season shouldn’t be about making money out of someone else’s loss, but about factoring what’s potentially at stake during this volatile period. As such, this article is to remind investors that business and capital flows are connected to natural disasters. With this information in hand, investors can make more informed decisions when such events occur.