Natural Disasters are becoming a problem for the Market
Also, think inflation is bad in the US? Don't look at Europe.
Wednesday, August 24th, 2022
The Market experienced an up day after its biggest one-day selloff on Monday since June. Major market indices all advanced for the day, but there are growing fears of a "Hawkish Fed" signal by the end of the week.
The S&P 500 rose by +0.29%
The Dow Industrial inched up by +0.18%
The NASDAQ Composite gained by +0.41%
The Russell 2000 was up by +0.84%
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The Market pulls back ahead of Powell’s Jackson Hole Speech
Following a sustained rally since mid-July, investors are bracing for another potential drop as the Market awaits Jerome Powell's speech at the Jackson Hole Economic Symposium later this week on Friday. Market observers anticipate that Federal Reserve Chairman Jerome Powell will reiterate a hawkish stance on inflation, meaning that the Fed will likely continue to raise interest rates by 0.5% or more to combat inflation at its next meeting in late September.Â
While investors have been buoyed over the past month by slowing inflation numbers, corporate earnings have cooled to 6.7%, the slowest growth since Q4 2020. Additionally, the number of companies asking for extensions to late file their earnings report has surged, with the Late Earnings Report Index rising to 160 (100 is normal), far higher than Q2 2022's value of 96.Â
More companies are reporting late
The Market generally perceives this type of delay as an indicator of poor earnings, with companies looking to massage their financials and corporate message before making their performance public. Given that riskier assets, such as meme stocks and high growth, low profitability tech stocks, have benefited from the recent rally, strategists urge caution if there's a pullback.Â
Expecting that Powell will not pivot the Federal Reserve's policy, hedge funds have built up significant short positions against the Fed slowing interest rate hikes. Market analysts rationalize that until the US economy shows signs of cooling, such as unemployment rates climbing, the Federal Reserve will continue to be aggressive in its fight to keep prices stable.Â
Think the US has it bad? Don’t look at Europe
The continued degradation of the global economy is also not helping the case for stock market optimism. On Tuesday, S&P Global released the results of its monthly eurozone Composite Purchasing Manager's Index, a survey that tracks business sentiment and activity across the economic bloc. The reading came below the neutral 50 point level at 49, which indicates that businesses believe that the economy is contracting.
At the core of the negative sentiment is natural gas, which Europe predominantly uses to generate electricity and heat homes. Following Europe’s embargo on Russian oil and gas, energy prices across the continent, with the UK seeing energy prices rise nearly 300% so far this year.Â
There is growing concern that later this winter when natural gas consumption rises as people heat their homes, inflation could peak across Europe. Citibank released a forecast this week showing that the United Kingdom could see inflation reach 18.6% by January, the highest for the nation in a half-century.
In addition to red-hot energy price inflation, natural disasters continue to sow havoc across Europe and the World.
Natural Disasters are a growing global economic threat
From floods and wildfires in Europe to droughts across Australia, the US, and China, natural disasters are occurring more frequently and are worsening with Climate Change. And their aftermath is causing increasing losses for both businesses and insurers.
SwissRE, the world's largest reinsurer, announced this month that total insured losses from natural disasters totaled more than $35 billion during the first half of 2022. While this is lower than the first six months of last year, the losses are still up 22% over the 10-year average.Â
Additionally, SwissRE has noted that it is seeing a greater proportion of weather-related claims (so-called "secondary natural disasters") than those from earthquake damage or tsunamis. The insurer also pointed out that only about 25% of natural disaster damage is insured, meaning that actual natural disaster costs totaled nearly $140 billion.
Why does this matter?Â
The US Government's Office of Management and Budget states that damage from wildfires, drought, floods, and hurricanes could cost the US nearly $2 trillion annually by 2100. This charge would eat up more than 7% of the Government's future forecasted budget per year.Â
It's becoming increasingly harder to deny the role that Climate Change plays in exacerbating these natural disasters. While the energy policy provisions in last week's Inflation Reduction Act could help soften its impact in the future, Climate Change is already here and deeply affecting business activity.Â
For example, China has been experiencing a heat wave for 73 days since early June, surpassing the record of 63 days in 2013. The unprecedented heat has caused the Yangtze River to fall to such low water levels that it has cut Sichuan Province's hydropower output by more than 50%.Â
In response, the Chinese Government has ordered the shutdown of factories for weeks at a time to give its citizens energy for air conditioning. Resultantly, this blackout is causing more supply chain disruptions across the consumer electronics market in the US, as automakers and technology components struggle to get their products to Market on time.Â
This current crisis echoes Taiwan's drought of last year, which severely delayed semiconductor deliveries. Those supply chain shortages helped spark the wave of inflation we now face.
As the US Government begins to build the semblance of a Climate Change plan, there is still a long way to go in coordinating global action to bring volatile weather events into a manageable state. And mitigating a warming planet is becoming increasingly more critical in the global economy's fight against inflation—lest it becomes the new normal, which would obviously be bad for business and thus the Market.Â
Stay frosty,
Alex with TAI