Autumn on the East Coast is a time when the snowbirds of the Northeast start planning their migration down south for warmer weather and a more relaxed winter. On the other hand, it’s also when Mother Nature tends to send her work from south to north in the form of hurricanes.
Most investors can see where the demand lies and where risks are exposed when severe storms hit and cause millions of dollars’ worth of damage to individuals and companies, while some businesses may benefit. Home improvement companies, water solutions companies, generator and battery makers, construction firms, and property and casualty companies are probably top of mind for most investors.
Hurricane season impacts people’s lives and their investments in unpredictable ways. Here, ETFsector.com reviewed the performance of S&P GICS sectors and how they performed one year out from the landfall of three notable storms.
Katrina (8/29/05), Wilma (10/24/05) & Irma (9/10/17). The table below shows 1-year cumulative return of the S&P sectors.
Note there are key differences across periods: 2005 (Katrina & Wilma): Booming economy, housing market bubble, high energy prices, growing deficits due to war spending. 2017 (Irma): Post-recession recovery, low unemployment, high stock market performance, technological dominance (e.g., big tech companies), but with concerns about inequality.
In the aftermath of major hurricanes like Katrina, Wilma, and Irma, many (GICS) sectors have shown resilience and even outperformance. This essay examines how Real Estate, Materials, Communication Services, Financials, and Energy sectors fared following these devastating natural disasters.
After Hurricane Katrina (2005), the Materials and Real Estate sectors showed strong performance in the following months as rebuilding began. The Energy sector experienced initial volatility but recovered as infrastructure was repaired and demand normalized.
Hurricane Wilma (2005) similarly impacted the Energy sector, but the Materials sector demonstrated strength in its aftermath. The Real Estate sector, while initially impacted, showed resilience as affected areas rebuilt.
Hurricane Irma (2017) caused significant concern among investors, with the VIX volatility index spiking. However, the market largely discounted Irma’s potential toll, with the S&P 500 rising the day after the hurricane’s landfall. The Energy sector rebounded quickly, and insurers rallied when loss estimates came in lower than expected.
Real Estate
The Real Estate sector typically experiences mixed results after hurricanes. Initially, property damage can depress values in affected areas. However, the subsequent rebuilding efforts often lead to increased demand for both residential and commercial properties. Real Estate Investment Trusts (REITs) specializing in apartments and self-storage facilities tend to perform well, as displaced residents seek temporary housing and storage solutions
Materials
The Materials sector often sees a significant boost following hurricanes. Companies producing building materials such as lumber, concrete, and steel experience increased demand as communities rebuild.
Communication Services
The Communication Services sector, which includes telecommunications companies, often demonstrates resilience after hurricanes. While infrastructure may be damaged initially, the critical nature of communication services means that repairs and upgrades are prioritized. The sector’s performance can vary, but it has shown the ability to rebound quickly after initial setbacks.
Financials
The Financials sector, particularly insurance companies, faces a complex situation after hurricanes. Initially, insurers may see their stock prices drop due to anticipated claim payouts. However, in the long term, many insurance companies benefit from increased premiums and more comprehensive coverage requirements in hurricane-prone areas. Historically, the Financials sector has shown mixed performance following hurricanes. While it may underperform in the immediate aftermath, it often rebounds as the market adjusts to the new risk landscape and insurance companies implement revised pricing models
Energy
The Energy sector’s performance after hurricanes can vary depending on the specific impact of the storm. Oil and gas companies with offshore operations in the Gulf of Mexico, for example, may experience short-term disruptions. However, if supply is constrained due to damaged infrastructure, energy prices may rise, benefiting companies with unaffected operations. Following hurricanes like Katrina and Wilma, the Energy sector experienced volatility due to damaged oil and gas infrastructure in the Gulf of Mexico. However, the sector has shown resilience and the ability to recover, often benefiting from increased demand and pricing power in the aftermath of storms.
In conclusion, ETFsector.com believes that using sector rotation to adjust your investment exposures when a significant weather event occurs can both mitigate risks and provide some upside. We understand these events impact people and the local economies and tend to produce short-term pain with a longer-term recovery. Investors need to do their research or consult their investment advisor to ensure trades fit into your longer-term plan.
