Extreme weather could be an “outsized and unnoticed” force for stock markets, analyst says

Extreme weather has beset the United States and Europe, with record heat waves in France and Spain, massive flooding and tornadoes in the American Midwest and an impending tropical storm barreling towards New Orleans’ already flooded streets.

U.S. corporations have begun to take notice of the threats of the growing incidence of extreme weather to their businesses, but according to Michael Arone, chief investment strategist at State Street Global advisors, investors should be attune to the economy-wide effects of these disasters too.

“Extreme weather is having an effect on economic growth,” Arone said in an interview with MarketWatch, even though it has had “little effect on markets,” as the S&P 500 SPX, +0.24% Dow Jones Industrial Average DJIA, +0.75%  and the Nasdaq Composite index COMP, +0.21%  have all reached record highs in the month of July.

In a recent research note, Arone laid out the case for why investors should start paying closer attention.“From record-setting heat to flooding in the midwest, weather could play an outsized and unnoticed role in upcoming economic releases,” he wrote.

He pointed out that since 1980, the US has experienced 246 different disasters that cost more than $1 billion, with 44% occurring in the past ten years alone. “Such events also have become more expensive, costing the economy more than $1.1 trillion since 2005 and $500 billion in the past five years” alone.

Such events cause the massive destruction of wealth, which must be rebuilt with debt-financed public investment and private dollars that could otherwise go towards building new wealth, creating a drag on economic growth that is spread diffusely throughout the economy, he said.

Investors should also be paying attention to the changing climate as it produces longer periods of extreme heat, he argued, pointing to recent studies that show that worker productivity cools as temperatures rise. It has and will continue to lead to lower economic growth, he said.

“As Geoffrey Heal and Jisung Park point out in their review of research on climate and human health, this means that an 84°F day reduces the country’s annual income by 0.065%, and 20 such days a year would reduce income by 1.2%, equivalent to a minor recession,” Arone wrote.

Federal regulators are also expressing concern over the issue of climate change and financial markets, as Commodity Futures Trading Commission (CFTC) announced Wednesday that it would establish Climate-Related Market Risk Subcommittee that will seek to “identify and examine climate change-related financial and market risks.’

Though the CFTC is still seeking nominations to the subcommittee of “experts from industry, academia and the public interest,” the findings of the committee could potentially lead to new guidelines or policy initiatives that encourage greater risk management and disclosure of risks to markets related to climate change.

Source: Read Full Article