Resilient People, Resilient Market, Resilient Economy

This week we need to talk about something that may not be next generation, but it is certainly once-in-a-generation, if that even. For the first time since weather records started being kept 166 years ago, two Category 4 Atlantic hurricanes hit the United States in the same year. Together, Hurricanes Harvey and Irma are estimated to have done approximately $250 billion-$300 billion in damage.

I think a lot about the lives that were lost, precious possessions that were ruined and homes that were destroyed or damaged. I lived through Hurricane Sandy – or Super Sandy as many called it – in New York five years ago, and I wouldn’t wish that on my worst enemy.

As people put their lives back together and areas rebuild, I get a little angry at the fear mongers who say that the U.S. economy or stock market can’t handle the impacts. Yes, the impacts are real – very real to those directly affected – but this is where the big-picture view we incorporate into our analysis provides an extremely valuable perspective.

The truth is that hurricanes can have a negative effect on the economy right after they hit, but a few months down the road, the rebuilding efforts can actually be a boost to the economy. And remember, the government steps forward after natural disasters and takes a large role in the recovery, including huge amounts of financial aid that will flow into the economy. Here are three recent examples:

  • Hurricane Andrew (1992): $11 billion federal aid package
  • Hurricane Katrina (2005): More than $110 million in federal dollars
  • Superstorm Sandy (2012): Nearly $55 billion in government assistance

This is one reason why the stock market is typically not affected in a major way by natural disasters. The market continues to be more influenced by the health of the economy when those disasters hit. For example, following Hurricane Andrew stocks were up 10.8% in the next 12 months. After Katrina, stocks gained 5.8% in the next year. The hurricanes didn’t cause the market to move higher, but the key point here is that both occurred when the market and economy were already strong, and the storms did not change that.

This is the same situation we have today. The fact that stocks hit new highs so soon after the nation watched Irma’s devastation shows the resiliency of the market. But that resiliency wouldn’t be there if not for the foundation of a strengthening economy and increasing corporate profits.

Over the weekend, President Trump cited Hurricane Irma as his basis for asking Congress to “speed up” tax reform. Treasury Secretary Steve Mnuchin said Tuesday that tax reform is the president’s number one priority, and that the administration is considering backdating any changes to the beginning of 2017. Lowering the corporate tax rate along with backdating any reform would be a huge boost for stocks.

Sectors with Increasing Demand

The market and economy should continue on their current paths, but in continuing our analysis and drilling down a little deeper, there are clearly sectors that will see a bigger impact. Let’s start with those that should see more demand for their products.

Energy Equipment & Services: The energy sector is prevalent in the Texas area that was hit by Hurricane Harvey, and there will be large amounts of money spent on repairs. The equipment & services stocks will benefit from increased demand to repair and rebuild. One name to look at is RPC Inc. (RES), which provides a variety of oilfield services and equipment for the energy sector. They may be called on more in the coming months as equipment is needed through their rental division.

Autos: To put things into perspective, if Texas were a country it would be the 12th-largest economy in the world. And the economy in Houston and its surrounding suburbs generated $503 billion worth of goods and services in 2015, which is about the size of Sweden’s economy. Add in the devastation in Florida due to Hurricane Irma and the amount of residents and businesses affected is huge. The two areas are not known for their mass transportation and therefore most people own at least one vehicle. Ford Motor (F) is a stock that could end up being a big winner as the F-series pickup trucks are the number one selling vehicle in the country and even more prevalent in Texas and certain parts of Florida. The stock is beaten down and trades at a low valuation with an above-average dividend yield of 5.3%.

Storage Facilities: The displaced residents of the areas hit by the hurricane will be in need of a place to store their belongings as they either rebuild or repair their current homes, so demand will increase. National Storage Affiliates (NSA) is the sixth largest owner/operator of storage facilities in the U.S. They have five in the Houston, Texas area as well as 27 other states throughout the country. A dividend yield of 4.4% makes the stock even more attractive.

Sectors to Avoid

On the flip side, there are a few sectors that might struggle a little bit in the coming months as the residents of Texas and Florida start the rebuilding process. Some of the battered stocks – such as travel, leisure, energy producers and insurance – will get a dead cat bounce in the near term. Historically, they get beaten down ahead of hurricanes and then snap back initially. However, looking at the likely economic activity over the next few months, tourism in particular will be hurt in the two affected areas.

This will make specific stocks such as Disney (DIS) and SeaWorld Entertainment (SEAS) ones to avoid as their businesses were directly affected. An airline that has a large number of routes to Florida and the Caribbean is JetBlue Airways (JBLU), which I would also avoid for the time being.

Over time, however, I have every confidence that hard-working people in all the states impacted by the storms will repair, rebuild and prosper.

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