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U.S. stocks reached new highs and were up 1.6% on the week. The S&P 500 reached 2,500 while recording its largest weekly gain since January. These gains came along with news that congressional Republicans plan to release the outline of a tax reform plan later this month. The possibility of tax cuts or tax reform could improve prospects for growth in 2018 and beyond, supporting elevated stock market valuations. Also, bond prices fell on the week as the 10-year Treasury interest rate increased from 2.06% to 2.20%, its largest weekly increase since June. But remember, bonds play an important role in portfolios because they usually rise when stocks fall.
Market Reactions to Tragic Events
Hurricanes Harvey and Irma are national tragedies that have devastated the lives of families and entire towns, an impact that will be felt for a very long time, and our thoughts are with those affected. Regarding investments, companies, economies and markets are also affected by the storms because the temptation for market speculation increases. Speculating on events such as these is different from investing and can provide unexpected results. Recent examples of speculation leading into Irma included insurance and travel-related stocks falling and housing-supplier stocks gaining in anticipation, only to reverse course early this past week because the storm was not as severe as expected. While it may be tempting to predict how individual stocks will trade around an event such as a hurricane, these tend to have only a short-term influence and are more concentrated. Ultimately, growth in a company's value will be determined by a much wider array of fundamental factors.
"The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices." – Benjamin Graham
There is surely a negative impact from the storms to the U.S. economy near-term. Early estimates from economists suggest the twin hurricanes will have a sizable negative impact on third-quarter growth. The high end of estimates suggests Harvey alone could cost $160 billion, although other estimates are in the range of $30-$50 billion, making it one of the costliest storms ever.1 And Houston is an important economy, the size of countries such as Sweden or Poland, presenting a significant percentage of the nation's oil-refinery capacity. However, the U.S. economy was doing well before the hurricanes hit, with expectations for growth to accelerate this year. While the hurricanes may be disruptive to GDP in the near term, the rebuilding process, along with the still-healthy underpinnings of the broader economy, suggests the U.S. remains on a path of improving growth. Keep in mind that it may take many months for demand to return to normal. A large portion of losses in Houston and Florida may not be fully recovered by insurance, the damage has affected jobs and incomes, and therefore rebuilding and replacing could take considerable time or not occur at all in certain aspects of the economy.
Looking at the past, the market has mostly stayed on course, continuing the trend prior to a major hurricane. After the six-costliest hurricanes that impacted the U.S. between 1992 and 2012 (Andrew, Ivan, Katrina, Wilma, Ike and Sandy), the market maintained its trajectory, which was up the majority of the time.
The Bottom Line: Don't allow unpredictable periodic events such as a natural disaster to change your strategy and the way you make important investment decisions. Where appropriate for the situation, consider rebalancing to an appropriate mix of stocks, bonds and international investments to prepare for the possibility of more volatile markets ahead.
1AccuWeather & Panmure Gordon
|Dow Jones Industrial Average||22,268||2.2%||12.7%|
|S&P 500 Index||2,500||1.6%||11.7%|
|10-yr Treasury Yield||2.20%||0.15%||-0.24%|
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