The start of the trading week, postponed for a couple days due to a little lady named Sandy, ushered in a stormy slide for stocks Wednesday. After the full force of Hurricane Sandy, a.k.a. Frankenstorm, struck against the densely populated Northeastern United States, the consequences of its economic impact are being assessed by the market. As I warned in my article preceding the storm, Hurricane Sandy - A Catalyst for Recession, it has produced an October surprise that could put us over the edge even before we reach the fiscal cliff. As noted previously, at the very least, the stock market will have to consider the possibility, and price it in to some extent. This unfolded in part Wednesday, and should continue to play a role in valuations as the impact and economic picture become clear.
Economists are generally in agreement with me regarding the significant negative economic impact of Hurricane Sandy; there is only variance in opinion about the degree of impact. However, the concern of investors should be that the untimely and unexpected storm will add another weight to an already burdened economy, and one that is facing at least another two important obstacles over the next two to six months, by my estimation. Those impending and foreseeable obstacles are the fiscal cliff (and what it brings) and the military confrontation of Iran, though it's interesting to note that neither has had much of an impact to stocks to date. Rather, it's been the corporate earnings season that is offering a tangible wake up call for investors. The show me market now needs a reason to justify the gains of stocks that have come on hope created by the latest efforts of the ECB and Federal Reserve.
Economic forecaster, IHS Global Insight, says property damage from the storm could approximate $20 billion, and lost business may amount to $10 to $30 billion in the fourth quarter. The impact to GDP growth is not negligible, though based on estimates for Q4 GDP, would not be enough to cause economic contraction by itself. The problem is that it's not the only issue facing us.
The broader markets were markedly lower at times Wednesday as a result of the storm, with the SPDR S&P 500 (SPY), the SPDR Dow Jones Industrial Average (DIA) and the PowerShares (QQQ) each in the red. However, some are buying on the weakness, perhaps on the basis of past history and market opportunities that have been born of similar catastrophes. Still, just as we've discussed previously, the economic impact of this storm, not the storm itself, is what is troubling. Yes, it's a one-time event, but it comes at a vulnerable time and could be a catalyst for recession given other issues. So it should not be perceived as old history, but instead as bad catalyst for an upcoming event.
The NYC area could be 2 to 3 weeks away from its subway system running normally, and some eight million people remain without power and many are also without water. And of course, the storm struck a much wider span of the country than just the important city that never sleeps. Yours truly lost power, hot water and heat for twelve hours while staying with family far from New York. I previously spoke of the lost sales of consumer discretionary companies (see the prior article) due to the disruption. Today, the market is assessing the impact to the airlines, property & casualty insurers and refiners as well as others.
Company & Ticker
United Continental (UAL)
Delta Air Lines (DAL)
Just as I suggested previously, the storm will affect some companies more than others, even within industries. And as I forecasted, it would help some companies. Today the shares of Home Depot (HD) and Lowe's (LOW) are up 2.3% and 3.2%, respectively, as I forecasted. Also notable, the shares of Macy's (M) are down more than the shares of Wal-Mart (WMT), just as I suggested in that prescient work.
Moving forward from here, we'll receive better estimates of the impacts to the economy, specific industries and companies, and valuations will bear out those realizations. Stay tuned as I assess the impacts to specific industries and stocks in upcoming articles, and as we prepare an important pre-election employment report preview.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.