After the Storm: Market Lessons for Hurricane Season

Eagle Daily Investor | September 14, 2018

Last year’s tropical storms killed thousands of people, caused $280 billion in damage and left Wall Street numb as company after company warned that an aggregate $1 billion in profit had washed away between the flooding and the wider disruption.

A lot of retail investors learned the wrong things from that summer. With Florence taking a straight shot at the Carolina coast, this is a classic wake-up call: shake off bad habits, avoid herd mentality and invest for recovery, not disaster.

Start with the standard “sell the insurance carriers and buy home repair” trade. At this point, it’s a cliche that storm damage translates into higher incurred losses for insurance companies. Property and casualty insurance companies pay out thousands of extra dollars to homeowners with damaged properties, who then promptly spend their claim checks on repair and improvement goods at stores such as Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW). This trend is why home repair stocks soared when it became clear that Hurricane Florence was coming, while companies like Allstate (NYSE: ALL) and Everest Re Group (NYSE: RE) sold off 6 percent.

It’s more a matter of behavioral economics than any intrinsic change in how much cash these companies are throwing off as the weather changes. Allstate is the most obvious question mark here. Granted, this is the major publicly traded carrier in North Carolina, but the real key players in the state don’t trade on Wall Street. (Think State Farm and Nationwide Mutual.) As a result, Allstate becomes the scapegoat for investors’ sense of helplessness and horror at watching another natural disaster play out on TV. We can’t change the weather or protect people in its path, so we make symbolic adjustments to our portfolios and reassure ourselves that at least our stocks are out of harm’s way.

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