Does the Impact of Natural Disasters Discriminate by Stock Sector?

September 08, 2017 | ,

To date, hurricane Harvey has caused more than 100 deaths in the United States and at least $70 billion in estimated losses. Without much time for recovery, hurricane Irma, recorded as the most powerful Atlantic hurricane in history, has already destroyed Caribbean islands and is now approaching Florida. As market participants’ sentiment is one of the most important drivers of asset prices, this week’s chart investigates how traders react to such natural disasters, and the impact on S&P 500 sector performance.

In this analysis, trader sentiment is measured by the number of messages about a specific company posted to the StockTwits website and then the PsychSignal algorithm computes their intensity (scaled from 0 to 4, 4 being the most intense), and groups the scores by sector. The mood score is calculated by bullish score minus bearish score. The more positive the score is, the more bullish the traders are toward that specific sector. The mood scores for each stock are averaged over 10 trading days since the outbreak and averaged again across stocks in the sector.

Considering that the maximum score is 4, the chart shows traders are slightly bullish but close to neutral across the board, and it is difficult to discern a profitable pattern based on these readings. If anything, traders tend to be more bearish on basic material and utility companies whose ability to process minerals and supply power can be tapered. On the other hand, traders are more bullish on consumer staples, energy and health care companies, which may see more demand amidst recovery efforts. During hurricane Harvey, traders have been bullish on energy companies and the sector returned 3.6%.

However, the series of natural disasters shown in the graph above reveals that there really is not a predictable correlation between sentiment and sector performance. For example, traders were bearish on basic material companies in 2009 and 2010. However, the sector returned 1.7% and 1.1%, respectively, during the earthquake (2009) and flood (2010) disasters. Traders were bullish on energy companies in 2011 but the sector returned -4.6%. This unclear relationship could be because the members of S&P 500 sector indices are large cap companies that are less influenced by short-term shocks than small cap companies. Also, StockTwits only represents a small portion of market participants and covers topics beyond natural disasters.

According to this analysis, how traders feel about the natural disasters cannot solely predict how the sectors will perform. Traders tend to keep quiet as natural disasters are an unknown factor and considered too risky upon which to make a buy/sell decision. It is interesting to observe how traders feel about natural disasters in terms of asset prices but not indicative of future returns.

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