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How Irma Could Affect U.S. Stocks

by Matt Lampert
Updated: September 11, 2017

No matter what happens in Wall Street's session on Monday, the temptation will be to chalk it up to Hurricane Irma. As investors brace for the storm, it's prudent to contemplate if hurricanes -- or natural disasters in general -- have any reliable impact on the stock market. An examination of the data and recent history reveal a counterintuitive conclusion: They don't.

Consider Hurricane Harvey. It made landfall in Texas on Friday night, August 25. Over the subsequent weekend, the photographs that came out of Houston were sobering. Tens of billions of dollars of damage. Reports that the storm could be the costliest in U.S. history. The nation's fourth-largest city reeling. Yet the Dow gapped up on Monday's opening, and on Tuesday it closed higher than it did before the storm hit.

The last major hurricane to make landfall in the continental U.S. prior to Harvey was Wilma in 2005. The storm was part of a record-breaking hurricane season. The Dow closed up 169 points the day that the storm slammed into Florida.

Earlier in 2005, there was Hurricane Katrina. The Dow closed higher the day the hurricane struck New Orleans. The market dipped the following session and then closed at its highest level in a week the day after.

Sandy wasn't technically a "major hurricane" by meteorological standards when it made landfall in the U.S. in 2012. But that didn't stop it from doing more than $70 billion in damage across 24 states, including cutting power around New York City and flooding the city's streets and subway lines. The Dow closed essentially flat -- down less than one-tenth of one percent -- in its first trading session after the storm surge hit New York. By the following day, the market was higher than it was before the storm banged into the Big Apple.

Sometimes the market goes down when a hurricane strikes. Witness the Dow's eight-tenths of one percent slide the day of Hurricane Andrew's landfall in 1992 and its net four-tenths of one percent decline (after initially going up) in the two trading sessions after Hurricane Ivan's landfall in 2004.

Flat then up after Harvey. Up after Wilma. Up, down and then up after Katrina. Flat then up after Sandy. Down after Andrew. Up then net down after Ivan. Do you see a pattern here? You shouldn't, because there isn't one.

Susana Ferreira and Berna Karali, two researchers at the University of Georgia, found a similar stock market phenomenon when they studied another variety of natural disaster: earthquakes. They examined what stock markets did in 35 countries following 177 earthquakes over a four-decade span. They concluded that there was "no systematic impact of earthquakes on aggregate stock market indices, either directly or through the control variables."

Natural disasters can cause devastation, flood streets and homes, displace thousands of people and shut down cities. Yet they have no reliable effect on the stock market.

The market could go up, down or sideways on Monday. But history tells us that the hurricane will have nothing to do with it.

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