How to Trade the Hurricane Harvey – Introduction
Hurricane Harvey has been called the worst disasters in the United States since 2004. The Federal Emergency Management Agency (FEMA) has said that the recovery from the hurricane will take years. And it is easy to see why. Roads have been submerged. Airports have been shut. Products in retailers have been destroyed. Utilities like internet and water services companies have been destroyed. Companies have been closed as workers remain in the recue facilities. As a trader, how do you trade in such a crisis?
A good starting point is to look at history and how the markets reacted. After Hurricane Katrina, the stock market remained resilient with the S&P rising by about 3%. The NASDAQ and the Dow Jones Industrial Average also went up by a slight margin. The market did not fall as many had expected. However, the market’s reaction after the 2001 terror attack was immediate. The markets fell as investors feared more attacks. There was also fear that the President of the United States would be a target during the crisis.
The two scenarios were different. In the case of Hurricane Katrina, the areas that were affected were in Louisiana, a relatively small area that accounts for minimum trade. On the other hand, the terror attack in New York and Washington was severe because of the size of the two cities. There was also fear of more terror activities. Another issue that is equally important is that there were forecasts of the hurricane. There was no forecast about the 911 terror attack.
To trade the Hurricane Harvey, first, you need to look at the so-called safe havens. One example of a safe haven is gold. When there are high risks, investors tend to move their money from risky assets like equities to bonds and gold which are usually safer. As seen below, while other asset classes fell, gold prices rose. The same is true when you look at other classes like bonds.
After looking at the safe havens, you need to look at companies that will be impacted. To do this, you need to look at the geographical location of Texas and the industries that maintain the state. As you will find out, Texas is one of the biggest oil and gas state in the country. It is home to many refineries and oil explorers. At this period, most of them have shut down operations. This will likely lead to lower revenues. Therefore, as a trader, it will be wise to short the refiners and oil and gas companies that are in the state. You can also buy similar companies that are not in the state as their competition will be reduced.
Another way of trading in the crisis is looking at infrastructure companies. A lot of destruction has happened in the state. Roads, water services, and houses have been damaged. After the floods are cleared and people’s lives come to normal, they will likely reconstruct their houses and buy new furnishings. Therefore, this creates opportunities for companies like Home Depot and infrastructure companies. It also creates a lot of opportunities for companies that sell home furnishings products.
With infrastructure damaged, it means that companies like Frontier Communications that provide internet fiber optic products will be affected. Their infrastructure products have been damaged which means they will be required to replace them. The same is true to companies that supply water and waste management services.
The biggest casualties of all this will be insurance companies like Geico, Chubb, and AllState. These companies will be required to pay people who have been affected by the disaster. Therefore, in the immediate effect, it will be wise to short the companies.
While the disaster is bad and fatal, it will create opportunities for companies. Companies that are likely to benefit from the disaster are technology companies like Google and Facebook, as well as cable companies like Fox and 20 Century Fox as more people use them to follow up on the disaster. Companies like those that deal with cement and lumber will also benefit.