How Hurricane Sandy Will Impact Stocks

If you’re reading this article, that’s good. That means your power wasn’t knocked out by Hurricane Sandy – or at least you sought cover somewhere that has power.

As I write this on a Monday afternoon, Hurricane Sandy is presently barreling toward the Northeast. Winds up to 75 miles per hour are expected at Wyatt Investment Research headquarters in Vermont. In some places, the wind could get up to 85 mph.

Millions of people up and down the East Coast loaded up on water and batteries to prepare for the inevitable power outages Sandy will bring. Some had to evacuate their homes altogether.

Even Wall Street shuttered its doors on Monday and Tuesday as the hurricane bore down on the New York City area.   

Weather-related shutdowns are rare on Wall Street. The last such occurrence was on September 27, 1985 for Hurricane Gloria. Massive snowstorms in January and February 1978 forced the New York Stock Exchange to either open late or close early  three times in the span of three weeks.

Hurricanes and snowstorms forced market shutdowns several other times in the late ‘60s and mid-‘70s. Still – this is the first time it’s happened in 27 years. That shows you just how dangerous Sandy is supposed to be.

So what should we expect once the market re-opens? With very little recent history, there’s not much to go on. After the 1985 storm, the S&P 500 plunged 5.5% the following week.

After 9/11 – the most recent multi-day market shutdown – stocks plummeted 11.6% in the first week after the markets re-opened. But the worst terrorist attack on U.S. soil in American history brought a whole different set of financial ramifications than a potentially catastrophic hurricane does.

Perhaps looking at market performance after recent hurricanes is the best way to predict where we go from here.

After Hurricane Irene laid waste to a wide swath of the Northeast last year, stocks actually got a 3.5% boost in the first three trading days following the storm before returning to pre-hurricane levels by the end of the week.

Stocks dipped for only one day after Hurricane Katrina made landfall in New Orleans in August 2005. Within 10 days of that disaster, the S&P 500 had actually climbed more than 2%.

Hurricane Andrew swept through Florida and Louisiana in August 1992 – and again the markets shrugged. The S&P vaulted 2.7% in the two weeks that followed Andrew’s devastation.

So maybe Wall Street doesn’t care about natural disasters.

In fact, it seems recent hurricanes have actually been “good” for stocks. Irene, Katrina and Andrew – the three most destructive hurricanes of the past 20 years – gave the markets a short-term push. Since 1965, the S&P 500 has posted average gains of between 3% and 6% in the months that followed the 13 most damaging hurricanes, according to Capital IQ analyst Sam Stovall.

But here’s the caveat: When weather-related events force a market shutdown, then Wall Street cares. Or at least it does for a few days.

Shutdowns equal uncertainty, and investors hate uncertainty.

Typically, however, that uncertainty subsides after about a week or so, and Wall Street traders return to their usual daily routines. Hurricane Sandy will probably drive markets down for a few days once the markets re-open. But it won’t take long for investors to re-focus on different issues – especially with a presidential election one week away.

History tells us that hurricanes’ impact on stocks are typically short-lived. That’s a relief for those of us who live on the East Coast. Sandy has already given us enough to worry about.

Stay safe.

P.S. In case you missed it, our resident options analyst Andy Crowder held another live options chat last Thursday, titled, “How I Collect Monthly Income Using the S&P 500 ETF”. You can watch the hour-long webinar in its entirety by clicking here.

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