As the severe Tropical Cyclone Marcia hit the shores near Yeppoon in North Queensland last week, the phenomenal stock market rally that has provided a +8% gain year to date, slowed in momentum. History has proven that natural disasters can have a direct impact on economic prosperity.
Midday on Friday 20th Feb, the ASX200 index is down 30-points for the day, or 0.5%. It’s not a strong movement, however, there are technical signals that buyer momentum is weakening.
From the low that was set on the 15th December 2014 @ 5,142, the ASX200 index is up 733 points or 14.2%. A new long-term high was set on Thursday 19th December @ 5,948. Year to date figures for the almost 2-months of the year thus far represent an 8.7% gain as at midday Friday. Hence, we have already achieved the long-term average annual gain.
Our analysis of current market activity is that the buyer momentum is slowing on each upward push into new highs. There just isn’t the same buyer enthusiasm as there was in late January, where this run in the market started.
As our the long-term expectation for stock market performance ranges around 8% per annum (this is based on historic long-term performance), on an average economic growth expectation, this year has already achieved normal expectations. But there are increasing uncertainties towards the Mining Boom and what impact lower commodity prices will have on economic growth.
So to have a series of unprecedented storms causing carnage and costing billions of dollars, will certainly have economic impacts. Hence, let’s take a look at some of the more recent biggest global economic impacts caused by Mother Nature.
Indian Ocean Earthquake – Asian tsunami – December 2004
With its epicentre off the west coast of Sumatra, this earthquake resulted in tsunamis that killed over 230,000 people in 14 countries. The most affected countries were Indonesia, Thailand, Sri Lanka and India. Despite the terrible cost in human lives and damage to infrastructure and homes, the economic affects were limited to local areas with minimal impact on the broader national economics.
For Indonesia, a World Bank study suggests the direct impact of the tsunami lowered national GDP growth rate by 0.1 to 0.4%
Hurricane Katrina, USA – August 2005
It is estimated that Hurricane Katrina has been the costliest natural disaster in US history. Property damage is estimated to exceed $80 billion USD. There was very little impact on the US stock market however, as it actually rallied slightly in the preceding days.
Japanese Earthquake – March 2011
A little closer to home, the tsunami that occurred off the coast of Japan had a direct impact with one of our major trade partners. The Japanese Nikkei was down over 20% in the weeks following. The combination of not only the personal and economic impact of the tsunami and earthquakes, but the additional meltdown of the Fukushima Daichi power plant added fuel to the fire (so to speak).
In conjunction with the Japanese market, the US stock market declined through the same period, and the ASX200 fell approximately 8% as well. It did recover, however within a month only to then change primary trend and decline through to the end of the year, where the unprecedented September ‘11 terrorist attacks caused a global market shock.
Revision of stock market activity following some of the more key natural disasters highlights specific causes and reactions. There is no doubt that local economies feel the impact of human and property loss. In most cases, the property loss is supported by economic aid and insurances. The human loss, on the other hand, is irreplaceable.
How will the Stock Market be effected?
Stock market activity will typically suffer a ‘sentimental’ reaction, especially if there is a direct cause for concern. The nuclear meltdown at Fukushima had a direct impact on energy supply to the country, let alone the listed company that owned the power station.
For TC Marcia that hit the Queensland coastline as I type, there will be a direct impact on the local economies; and key insurance companies such as QBE Insurance (QBE) and Insurance Australia Group Limited (IAG) (both are down at time of writing) will need to deal with the economic repercussions. And although the ASX200 is showing broader weakness in buyer momentum, any pullback in the markets is likely to be influenced by a strong short-term gain (profit taking) made in the first two months of the year rather than panicking sellers concerned about economic impact from the cyclone.
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