"There are some things you learn best in calm, and some in a storm" Willa Catha

 As we read about the devastation caused by storm Harvey to Houston and the accompanying stories of human suffering. North Korea creates its own storm for equity investors as the news channels announce Kim Jung Un released a missile which crossed over Japan. However, if some of his previous missile tests are anything to go by, one can’t be certain that was where he was aiming.

John Authers in the Financial Times published a piece focussing on what the economic impact can be of such devastation as the one currently taking place in Houston. His overriding conclusion, based on history and the impact of Katrina on New Orleans, is that the economic effect of such disasters is limited, obviously, the human impact is a different matter. The article quotes Deutsche research which suggests there is a short-term impact on economic growth but the rebuilding then has a positive impact. It is also quite possible that the Federal Reserve will be even less inclined to raise rates in the face of this disaster. Individual sectors, for example, those exposed to property and casualty insurance, take a short term hit but again tend to recover as there is the opportunity going forward to raise premiums.

The oil price initially rose about 3% on the possible supply disruption. About 20% of the oil production from the Gulf has been disrupted, but supply apparently is now restarting. The current oversupply will probably suppress any material impact on oil prices. There is also some impact on shipping and storage but again the effect seems limited according to press reports. The biggest impact appears to be on the currency as the US dollar trades below 1.20 to the euro. According to the Financial Times this is the longest losing streak for the dollar in 14 years.

Equity markets have taken the news overnight that North Korea released a missile over Japan with the natural expected knee jerk reaction. Wars are often thought to be good for stock markets and I am grateful to Ned research who have produced an interesting piece on the impact on the Dow Jones in crisis events over time. On the timing of the event, the median impact is about 3% to global equities, however, this number is slightly skewed by the 1907 panic as equities fell 40% and a similar move the date of the 1929 crash. However, if you look 3 to 9 months out the median gain is 17% for the Dow Jones.

Barron’s also conducted its own analysis of the impact of an increase in military tensions. They took 8 events starting with the invasion of Grenada in 1983 and concluding with the US bombing of Libya in 2011. The conclusion to their research is that ahead of the moment US hostilities commence equity markets suffer, the moment US hostilities commence there is a sharp recovery in equity prices. There does appear to be some truth in the adage buy on war.

Posted on August 29, 2017 .