Stock markets were higher this week, despite Hurricane Harvey and a weaker-than-expected jobs report. The S&P 500 was up 1.5 percent, ending the week close to the all-time high of 2,480 from early August. Bond yields slid slightly lower, with the benchmark 10-year Treasury yield dipping to 2.14 percent. August’s nonfarm payrolls report showed a gain of 156,000, which was below the expected 180,000 jobs. This is not surprising, as August expectations have been overestimated for the last seven years and are considered “quirky” by analysts. This week’s revision of second quarter gross domestic product (GDP) showing national economic growth of 3 percent certainly would have been more newsworthy if not for the hurricane. This GDP report was the strongest in two years and serves as evidence that consumer spending and business investment are the foundation of the economy.
Harvey Hits Hard
Our thoughts and prayers are with clients, friends and family in Texas and Louisiana as they navigate the impact of historic rains and deadly flooding wrought by Harvey. The storm made landfall in Rockport, Texas, as a Category 4 hurricane and then complicated matters with its extremely slow movement through the region as a tropical storm. Harvey has crippled the nation’s energy hub and rendered half of the Gulf of Mexico’s oil refining capacity inoperable. Over 30,000 people have been forced out of their homes and some 50,000 are expected to report damage from flooding. Overall, damage estimates currently vary widely, from $75 to over $150 billion, making Harvey one of the most expensive hurricanes to hit the United States.
Houston has been particularly devastated with the storm. It is the fourth largest city in the nation, encompassing eight counties spread over an area that is larger than New Jersey. The region is home to 18 Fortune 500 companies and would equate to the 30th largest economy if it were its own country. Both Louisiana and Alabama are now dealing with the remains of the tropical storm. There is no doubt that the fallout from Harvey will impact a broad region in the coming months, years or quite possibly the next decade.
Knowing this, how did Harvey impact the capital markets this week?
A Rise in Gasoline Prices
Gasoline futures hit a two-year high this week, as refineries shutdown and pump stations were submerged along the Gulf Coast. AAA reported that the current nationwide average price-per-gallon of $2.40 is expected to rise to over $2.50. The shutdowns could reduce east coast gasoline inventories to 3-to-5-year lows. Fuel companies, such as Valero, have already stopped supplying non-Valero-branded gasoline stations in the Northeast and Shell has reduced some supplies in the lower Atlantic. European refiners are loading tankers for the U.S. and shipbrokers are reporting the highest-expected cargo flows to New York since last November. Price increases should slow down within the next month, as refiners and pipelines come back on line.
As with the rest of the U.S., Hurricane Harvey had traders glued to the news coverage, but you wouldn’t be able to tell by the stock market reaction. Both the S&P 500 and Dow Jones Industrial Average rose this week. Historically, stock markets tend to ride out the storms: The S&P 500 was only down .2 percent a month after Hurricane Katrina and was up in subsequent months. Storms have a tremendous local impact, but they are dwarfed by the sheer magnitude of the national economy, which has the capacity to absorb the damage. Certain industries are more susceptible to storm impacts: Home improvement stocks tend to increase while insurance companies may decrease.
Monitoring Texas Munis
It was a slow week for bond traders. With the summer season capped by Labor Day weekend, we haven’t seen significant price decreases in Texas bonds. Both Texas and Houston have experienced outsized economic growth over the last several years and currently carry high investment-grade ratings. We expect to see impacted state and local government revenue decrease, but federal assistance should offset much of the disaster’s impact. It is significant to note that natural disasters have never caused any municipal borrower to default on payments, but that will not preclude us from monitoring the impacted regions closely.
Takeaways for the Week
- Stock and municipal bond markets took the storm in stride
- The economy continues to strengthen: second quarter GDP was stronger-than-expected and August nonfarm payrolls were slightly weaker
- Gasoline prices rose to a two-year high