Friday, November 24th, 2017

Stock Market Quickly Gets Over Irma

 

As hurricane Irma tore through the Caribbean with Florida in its sights the stock markets of the world paused in their upward climb. Now that the hurricane has passed with less than expected damage the markets are back to their continued rally. Reuters notes that world stocks build as Irma weakens.

World stocks climbed to record highs on Tuesday as an easing in tensions over North Korea and signs that Hurricane Irma was causing less damage than feared in the United States boosted risk appetite.

The MSCI All Country World Index .MIWD00000PUS edged up 0.2 percent, building on Monday‚Äôs 0.9 percent gain — its fourth-biggest so far this year.

The pan-European STOXX 600 index jumped to a one-month peak as insurers .SXIP made further headway and basic resources .SXPP and financials .SX7P joined in the rally.

Wall Street stocks futures rose, with the S&P 500 .SPX eyeing a fresh all-time high after hitting a record closing level in the previous session.

It all has to do with strong corporate earnings. Successful long term investors gauge a stocks true value using an intrinsic stock value calculation as explained by Profitable Investing Tips.

The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation.

So as long as earnings are strong investors expect to see more and are willing to bid up stock prices. It does not hurt stocks that interest rates are so low. The question might be that while the stock market shrugs off damage from hurricanes what happens when interest rates go up or when the costs of reconstruction in Florida and Texas come to bear on the market?

Investopedia says that with time stocks and the economy will suffer from the hurricanes.

Hurricanes Harvey and Irma are likely to deliver a combined hit of at least $290 billion to the U.S. economy, equal to about 1.5% of annual GDP, according to estimates by AccuWeather Inc. This comes while stocks, as measured by the S&P 500 Index (SPX), are in a fragile position, essentially having traded sideways for about three months. The economic blow from Harvey and Irma will flow through to reduced corporate profits, putting further downward pressure on stocks.

The underlying problem is that the uninsured losses from these two hurricanes will exceed $200 billion. That is more than hurricanes Sandy and Katrina combined. The concern in this case is that the overpriced market is due for a correction. Usually corrections are fixed as the economy grows. But if the double whammy of two hurricanes causes even a mild recession then watch out. The stock market may have gotten over Irma for now expecting strong future earnings but if earnings fall due to hurricane related losses watch out!

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