So the reason we’re seeing a rally instead of a massive sell-off is simply because Irma is not as bad as it might have been.
If you or your loved ones are in Florida, I sure hope everything is OK. My mom lives on a marsh on the Georgia side of the St. Marys River, as it enters the Atlantic about 30 miles north of Jacksonville. She tells me the marsh grass is totally underwater, which is very unusual. But other than a few flash flood and tornado warnings, they are basically fine.
Of course, there’s another hurricane sitting out in the Atlantic that could cause problems. As best I can tell, Category 3 Jose is most likely to stay out in the ocean and never make landfall on the continental U.S. But you never know; there’s also a scenario where Jose makes a direct hit on New York City…
This is shaping up to be a pretty bad year for hurricanes. Damages must be well above $100 billion by now. I don’t even want to think about what a hit on New York would mean. Hurricane Sandy from 2012 caused $75 billion in damage.
Now, you might have noticed that stocks are up pretty big today. The S&P 500 (NYSEARCA:SPY)is up nearly 1%. The Dow Industrials (NYSEARCA:DIA) are up a bit more than 1%, adding +220 points. If that seems a bit surprising, check this out: the biggest winner on the Dow is The Travelers Co. (NYSE: TRV). The $34 billion insurance company is up 3% to $123.50.
Is there any way this makes sense? Well, actually, yes, there is…
Travelers was trading for $130 a share before Harvey devastated Houston. It fell as low as $115 last week. But now that Irma has made landfall in Florida, it appears to be weakening faster than expected. And expectations are the critical factor.
It’s Always About Expectations
Back in October 2012, the S&P 500 was trading around 1,460 before Sandy hit. A month later, the S&P 500(NYSEARCA:SPY) had fallen a whopping 7% to 1,350. A similar move today would lop 172 points off the S&P 500, dropping it down to 2,288 (where it was in February of this year). A 7% drop would look even worse for the Dow. That would make for a 1,500-point drop.
Sandy was way worse than expected. New York subways were flooded. 5,000 flights over a two-day period were cancelled. The stock market was closed for two days.
So the reason we’re seeing a rally instead of a massive sell-off is simply because Irma is not as bad as it might have been. I realize that’s little consolation for anyone who is in the storm’s path. But, as always, my professional focus is on the investment/economic aspect of events.
The combination of Harvey and Irma is still pretty bad. It might cost a half-point of GDP growth as people drive less, work less, and shop less as they try to get their lives back in order. But there will come a time when lives are back in order, and then we will see a surge in economic activity. Yeah, it might sound pretty callous, but hurricanes tend to actually be stimulative for the economy.
After Sandy, the S&P 500 bottomed on November 15, at 1,353. A year later, it was hitting 1,800. And while we can’t credit all of that 33% run to the aftermath of Sandy, that storm does get some credit. All the building, new car buying, clothes shopping, etc. had an effect. 2012 GDP growth was 1.28%. GDP growth in 2013 surged to 2.6%, the third highest annual growth since the financial crisis.
Don’t Look a Gift Storm in the Mouth
Clearly, traders are looking past the immediate drag on GDP from the storms and focusing on the stimulative effect that will hit down the line. And, again, if we peruse the gainers for the Dow Industrials, there are some patterns that make sense. After Travelers, the biggest gainers on the Dow are American Express, Intel, and Cisco. I’m not sure about Intel, but I can well imagine more spending helps AMEX. And when companies start rebuilding damaged networks, Cisco will benefit.
3M (NYSE: MMM), Johnson & Johnson (NYSE: JNJ), and Procter & Gamble (NYSE: PG) will benefit as households resupply staples. Goldman Sachs (NYSE: GS) and JP Morgan (NYSE: JPM) will likely be underwriting some municipal bond offerings.
As I write, there are two Dow stocks in the red: Caterpillar (NYSE: CAT) and Home Depot (NYSE: HD). I will readily admit I have no idea why Home Depot is in the red. You’d think this company would stand to benefit as homeowners take insurance money and repair damage to their homes. After all, 8% of Home Depot’s stores are in Florida, and 9% are in Texas.
I suppose you could assume that Home Depot is weak because Irma may not be as bad as initially expected. And if that’s the case, the stock is very likely to reverse this weakness and make a nice 3–5% move higher. Some October Home Depot call options at the $160 strike might be a good idea. They are trading around $1.
You might also keep an eye on Ross Stores (NASDAQ: ROST). I can’t speak to what kind of damage its stores have undergone, but 27% of Ross Stores are in Texas and Florida. That is a huge percentage, and so we can say that Ross has an oversized exposure to both hurricanes. That will certainly be a negative impact on sales right away. But it’s just as likely to lead to a nice surge down the line.
Ross is trading around $58 right now. But the 52-week high is up around $70. Some October 62.50 calls at $0.35 apiece could work out really nicely.