| How unprecedented was the devastation that Katrina wrought?
Asking this question may seem a bit unseemly in the face of the human tragedy and suffering that the hurricane caused in the Gulf region. But, at some point or other in recent weeks, and in one form or another, almost all of us have asked this question as we tried to assess Katrina’s long-term impact on the economy and the financial markets.
To be sure, some will insist that it is futile to find historical precedents. Never before has devastation of Katrina’s magnitude hit an area that is as crucial to the shipping and energy infrastructure as the New Orleans region is to today’s economy.
But, this nihilistic argument is a slippery slope, at the bottom of which is the conclusion that we can learn nothing from history. Of course, every event is, in at least some ways, unique. But, it’s only insofar as an event has similarities with past occurrences that analysts can do any better than simply guess its impact.
The editors of a few of the newsletters I track have been willing to avoid the temptation to throw up their hands and say that what happened earlier this week in and around New Orleans has no precedent. Richard Russell, editor of the Dow Theory Letters, for example, devoted a chunk of one of his recent online updates to quoting someone who had written to him to say:
“I was just thinking [of] the enormity of what happened in New Orleans. Probably the only thing even remotely similar that happened in the USA was the 1906 San Francisco earthquake and fire, and the Hurricane that hit Galveston, TX [in 1900].”
This comment prompted me to turn to the historical record to see what, if anything, we can learn from those two precedents.
Consider first the April 18, 1906 San Francisco earthquake, described on a website maintained by the city of San Francisco as “…an unparalleled disaster in the history of San Francisco. More than four and one-half square miles of San Francisco burned and crumbled into a windswept desert of desolation. Nearly 200,000 people out of San Francisco’s population of 450,000 were left homeless by the disaster.”
The hurricane that hit Galveston in 1900 is described by a Smithsonian website as follows: “On September 8, l900, a hurricane that had swept across the Gulf of Mexico slammed into Galveston, Texas. Situated on an island that amounted to little more than an unprotected sandbar, the city was devastated. Entire neighborhoods were obliterated. Shipping facilities were demolished. Some 8,000 people died.”
Another precedent that I’ve seen drawn to Katrina’s devastation was to a hurricane that hit Florida on September 16, 1928. In the days following that hurricane, newspaper headlines around the country read “Florida Destroyed! Florida Destroyed!”
The accompanying table shows how the stock market reacted to these three past natural disasters. I used the Dow Jones Industrials Average to measure the market’s reaction because it is the only major benchmark that existed in the early part of the last century.
Note carefully that the percentage gains or losses in the table are relative to the Dow’s level on the day before the disasters struck.
|
DJIA
1 week
later |
DJIA
1 month
later |
DJIA
3 months
later |
DJIA
6 months
later |
Galveston , TX hurricane 9/8/1900 |
-3.0% |
-4.8% |
+10.0% |
+16.1% |
San Francisco earthquake 4/18/1906 |
-3.9% |
-3.9% |
-10.3% |
-1.1% |
Florida hurricane 9/16/1928 |
+1.3% |
+5.5% |
+14.3% |
+35.0% |
The pattern that emerges from these data appears to be that the market declines immediately but recovers most, if not all, of those losses within three to six months.
Generalizations based on a sample of just three necessarily must be tentative, of course. But, in this case, I am inclined to place confidence in the generalization because it is consistent with the findings of other research into how the market reacts to major geopolitical events.
Ned Davis Research, for example, has found that, six months after the 28 biggest geopolitical crises between 1940 and 1998, the stock market, on average, was 2.3 percent higher than where it stood immediately before those crises began.
We probably should not be surprised by this finding. The markets are a discounting mechanism, reflecting companies’ earnings, cash flow and dividends over many years into the future. Only if Katrina’s impact were to be a nearly permanent decrease in the profitability of American corporations would a permanently lower stock market level be justified.
This appears to be what Timothy Lutts, editor of the Cabot Market Letter, had in mind in the September issue of his newsletter when he wrote: “Our sympathies go out to all affected. But the region will recover; it’s the American way.”
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