Hurricane

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A hurricane* is a type of tropical cyclone, forming over tropical or subtropical waters. Tropical cyclones are rotating low-pressure systems characterized by organized thunderstorms and the absence of fronts, which are boundaries separating different air masses. When a tropical cyclone's maximum sustained surface winds are below 39 miles per hour (mph), it is classified as a tropical depression. Cyclones with winds of 39 mph or higher are termed tropical storms. Upon reaching 74 mph, a tropical storm is designated a hurricane. The Saffir-Simpson Hurricane Wind Scale, ranging from category 1 to 5, rates hurricanes based on their maximum sustained winds, with higher categories indicating greater potential for property damage. Hurricanes typically originate in the Atlantic basin, which includes the Atlantic Ocean, Caribbean Sea, Gulf of Mexico, the eastern North Pacific Ocean, and occasionally the central North Pacific Ocean. These storms are identified using a six-year rotating list of names maintained by the World Meteorological Organization. This week, Hurricane Beryl, the earliest category 5 hurricane on record, caused significant damage along its path before making landfall in Texas.

The hurricane season spans from June 1st to November 30th, though hurricanes can and have occurred outside this period. Flooding, resulting from catastrophic rainfall and storm surges, accounts for approximately 60% of a hurricane's total damages, while wind damage also contributes significantly. Beyond human impacts, hurricanes affect various asset classes. For instance, Hurricane Katrina disrupted up to 19% of U.S. oil production and 24% of natural gas supply, damaging 20 offshore rigs and halting production in Louisiana refineries. This led to a national gas price surge, surpassing $3 per gallon for the first time.

Extreme weather events like hurricanes introduce significant uncertainty for businesses, affecting their capital, operations, and environment, which is reflected in the financial markets through increased volatility in stock and option prices. Initially, investors underreact to hurricane impacts, leading to mispricing and potential abrupt price corrections. This underreaction was notably present before Hurricane Sandy in 2012 but has since diminished, indicating improved market efficiency.

Hurricanes disrupt businesses through physical damage, operational interruptions, and supply chain issues, though they can also create opportunities for some firms. The complexity and unpredictability of these impacts result in prolonged investor uncertainty, persisting for months post-landfall. Despite improvements, the historical underreaction to extreme weather risks reveals ongoing market inefficiencies. Another study indicates that stocks negatively affected by economy-wide hurricane losses exhibit a risk premium exceeding nine percent annually compared to those that react positively. The hurricane risk premium is particularly high for larger firms, those located in historically hurricane-exposed states, and companies in the construction, manufacturing, services, finance, insurance, and real estate sectors. Sectors that can see their profits positively impacted by extreme events are Businesses tied to house repair, roof repair and construction typically outperform during these weather events. This is especially true for companies with exposure to the countries or regions impacted by the weather pattern. And no… we are not referring to political hurricanes about to see landfall.

The record of the costliest tropical cyclone in the Atlantic is held jointly by hurricanes Katrina (2005) and Harvey (2017), both of which resulted in approximately $125?billion in property damage during the year they occurred. These storms are also the costliest tropical cyclones recorded worldwide. The hurricane seasons of those two hurricanes, the 2005 and 2017 Atlantic hurricane seasons, are also the two costliest hurricane seasons recorded. Due to their excessive damage, the names of tropical cyclones accruing at least $1?billion in damage are usually retired by the World Meteorological Organization, but this is not always the case.

A combination of advanced technology, sophisticated modeling techniques, and human expertise enables accurate predictions of hurricane paths, helping to mitigate the impacts by providing timely warnings and preparations. Investors typically pay close attention to both the gulf of Mexico where many oil rigs are located, having a major impact on oil prices and whether the hurricane has big cities in its path.

* Source: National Oceanic and Atmospheric Administration