Market Anxiety over Natural Disasters

A headline caught my attention the other day. It was, “What to Tell Clients Feeling Market Anxiety.” The article began by stating that financial advisors have seen an uptick of clients calling about overwhelming fears of a possible market correction. There seems much more to worry about these days. Rising tensions with North Korea, an incoherent government, and multiple hurricanes striking the U.S within weeks have investors on edge.

Investment returns couldn’t really be any better this year. Both the stock and bond market have had monumental gains over the past year. I’d hate to see investors anxieties if they actually experience a loss! I find that the same cast of characters are warning of a market bubble and their warnings grow louder as investors turn their attention to these devastating hurricanes.

The short-term impact of these storms has been very negative for the markets. However, it’s much more difficult to predict the long-term impact. Warren Buffett remains optimistic. He predictes that the damage from Harvey won’t derail the relatively steady 2 percent growth in the U.S. economy, but it will be devastating to some individuals and families. In the interview, he went on to say, “Berkshire hasn’t written much catastrophe insurance in recent years because prices were too low, so that will limit the Omaha, Nebraska-based company’s exposure.” Insurance premiums will surely rise after these storms, as companies payout claims.

The inner workings of the economy are so complicated that it’s impossible to say for sure how the hurricanes will impact the stock market. The warnings coming from government officials to flee Florida ahead of the hurricane were very telling of what will come next. They stated that we can’t fix your life, but we can fix your house. The silver lining of the devastation caused by Irma and Harvey will be a massive rebuilding effort that will bring people together. It could even cause the government to begin to work together again for the people instead of serving their own self interests.

The real losses will be those lives changed forever by these terrible storms. In Houston, 80% of the homeowners lacked flood coverage. In the aftermath of Hurricane Harvey, President Trump tweeted that the storm had brought a “once in 500-year flood” to Houston, and expressed support for relief efforts. A 500-year flood does not predict the timing of a flood, but these terms refer to the chance of a flood occurring at all. A 500-year event has a 1 in 500 chance of occurring in a single year. A 500-year flood zones has a probability of 0.2 percent. These scales are flawed and out of date. They fail to take into account climate change. It is very difficult for government officials to update these flood plains because people buying homes don’t want to live in flood zones because property values will drop when maps are updated. Hopefully, the government will continue to step up and help many of these families that are in desperate need.

I expect market volatility to continue to rise over the coming weeks as investors monitor the economic impact of the hurricanes and whatever else might be lurking around the corner. As always, if you have any concerns on the market, please feel free to give me call or a schedule a meeting with me.

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