Hurricane

A ^hurricane1 is a type of tropical cyclone that forms over tropical or subtropical waters. Tropical cyclones are rotating low-pressure systems characterized by organized thunderstorms and the absence of fronts, which are boundaries between different air masses. When the maximum sustained surface winds of a tropical cyclone are below 39 miles per hour (mph), it is classified as a tropical depression. Hurricanes with winds of 39 mph or higher are referred to as tropical storms. When winds reach 74 mph, a tropical storm is called a hurricane. The Saffir-Simpson Hurricane Wind Scale, which ranges from Category 1 to 5, rates hurricanes based on their maximum sustained winds, with higher categories indicating a greater potential for property damage. Hurricanes typically form in the Atlantic basin, which includes the Atlantic Ocean, the Caribbean Sea, the Gulf of Mexico, the eastern North Pacific and occasionally the central North Pacific. These storms are identified by 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 in its path before making landfall in Texas.

The hurricane season extends from June 1 to November 30, although hurricanes can and have occurred outside of this period. Flooding caused by catastrophic rainfall and storm surges accounts for around 60% of total hurricane losses, while wind damage also contributes significantly. Beyond the human impact, hurricanes affect various asset classes. For example, Hurricane Katrina disrupted up to 19% of US oil production and 24% of natural gas supply, damaged 20 offshore drilling rigs and halted production at refineries in Louisiana. This led to a national spike in gasoline prices, which exceeded $3 per gallon for the first time.

Extreme weather events such as hurricanes create significant uncertainty for companies, affecting their capital, operations and environment, which is reflected in the financial markets through increased volatility in equity and option prices. Initially, investors often underreact to the impact of hurricanes, leading to mispricing and potential abrupt price corrections. This underreaction was particularly pronounced prior to Hurricane Sandy in 2012, but has since diminished, indicating improved market efficiency. Hurricanes disrupt businesses through physical damage, business interruption and supply chain issues, but can also create opportunities for some companies. The complexity and unpredictability of these impacts lead to prolonged uncertainty for investors that lasts for months after landfall.

Despite improvements, the historical underreaction to extreme weather risks continues to highlight existing market inefficiencies. Another study shows that stocks negatively affected by economy-wide losses from hurricanes have a risk premium of over nine percent per year compared to those that react positively. The hurricane risk premium is particularly high for larger companies, those located in historically hurricane-exposed states, and companies in construction, manufacturing, services, finance, insurance and real estate. Industries that can see their profits positively impacted by extreme events include companies associated with home repair, roof repair and construction. These industries typically outperform during such weather events, especially for companies with exposure to countries or regions affected by the weather pattern. And no… we’re not referring to political hurricanes that are about to make landfall.

The record for the costliest tropical cyclone in the Atlantic is jointly held by Hurricanes Katrina (2005) and Harvey (2017), both of which caused around 125 billion dollars in property damage during the year of their occurrence. These storms are also the costliest tropical cyclones on record worldwide. The hurricane seasons of these two storms, the Atlantic hurricane seasons of 2005 and 2017, are also the two costliest hurricane seasons on record. Due to their enormous damage, the names of tropical cyclones that cause at least $1 billion in damage are usually removed from circulation by the World Meteorological Organization, although this is not always the case.

A combination of advanced technology, sophisticated modeling techniques and human expertise enables accurate predictions of hurricane paths, which helps to mitigate the impact through timely warnings and preparations. Investors typically pay close attention to the Gulf of Mexico, where many oil rigs are located and have a major impact on oil prices, as well as whether the hurricane will hit major cities in its path.

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