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Hurricane season starts June 1, and that means the country will start bracing itself for preparations and any cleanup of damages to come. Many stakeholders exist: homeowners, business owners, government officials, insurance firms, materials suppliers, energy firms, etc. The list goes on and on.
As people from several industries prepare for what might come, the market is preparing, too. For years, a lot of research has gone into how the markets perform during this period, and a few insights stick out to help the best investors brace themselves.
Individual sectors and companies tend to stand out during major hurricanes.
XLE and XLP, the ETFs for consumer staples and energy have been up 64 percent of the time in the five days following a category 1 hurricane landing, according to Kensho analysis. Their average returns for just that one week are pretty stout: 0.46% for XLE and 0.39% for XLP. Note that the ETF data goes back to 1999.
That oil trade tends to stay consistent. Looking at category 3 hurricanes again (which includes Katrina), Kensho's analysis shows that oil and energy continue to outperform, with XLE averaging a 2 percent return in the week after, and OIH averaging 3.34 percent.
If you go beyond just basic stocks, look at commodities and options trades.
In particular, gold has done well. Two years ago, when Ed Sollbach was a quantitative analyst at Desjardins Securities, he showed that gold was a clear winner after natural disasters. It averaged a a 3.4 percent return in the full month following. In the case of Katrina, it did even better, rising 2.1 percent in the first five days, and 6.3 percent after 21 days.
Finally, for those traders who want to stay market neutral, look at options. Evan Hewitt, then a student at Macalester College in St. Paul, Minnesota, showed that a market-neutral options trade could be made on a portfolio of insurance company stocks. These trades focus on the increase in volatility that occurs based on the news of a pending hurricane (whether the stock goes up or down).
These strategies include a long straddle, long strangle, short condor, and short butterfly. "Each of these strategies is successful pending a large enough move in the share price of the underlying company in either direction," Hewitt wrote. Some of the stocks he considered were AIG, Berkshire Hathaway, Chubb, Travelers, and CNA, including a dozen others.
It's been well-researched and reported that the overall market doesn't respond in a meaningful way to hurricanes. The trends of the markets tend to just continue as they were, despite the big storms. "Individually, the market's performance following major hurricanes has been uneven, as equities are more likely driven by wider-reaching global events than localized natural disasters," Sam Stovall of S&P Capital IQ had previously said in an analysis of post-hurricane market movements.
Even CNBC previously reported that "big disasters have rarely caused big drops in stock markets immediately after they happened." Other analysis of the markets have similarly reached this conclusion: "The markets don't retreat after a big storm hits."
Even specifically about Hurricane Katrina, "Surprisingly, the S&P greeted the hurricane with an eight-day, 3 percent rally. Thirty-eight trading days, the S&P was 2.4 percent lower. In terms of stock market performance, the most costly natural U.S. disaster was no more than a footnote; it couldn't even be picked out on a chart."
CORRECTION: Evan Hewitt was a student at Macalester College, not a professor.