Weathering the Storm

New Yorkers brace for more snow. Photo by Spencer Platt/Getty Images.

Last month, the who’s who of global finance held their annual Davos, Switzerland boondoggle, otherwise known as the World Economic Forum—and as usual, they released their yearly top-10 global risks. Number six for 2014: “Greater incidence of extreme weather events.” Now here we are, less than three weeks later, with blizzards and ice storms buffeting the US, the Thames flooding as England continues its wettest winter in 250 years, Tokyo shut down amid the biggest winter storm in years and Thailand enduring the coldest winter in decades. Weather has already taken the blame for several lackluster economic results, and economists seem convinced the rain, snow and ice will be a drag on Q1 growth. But lest you fret the Davos braintrust’s prediction is coming true, take heart: Any impact from winter weather should be fleeting—it shouldn’t put the global expansion or markets at risk.

Not that there won’t be any impact. Businesses are closed throughout the US, UK and Japan, where the government told every Tokyo resident to stay home. Shipping routes are disrupted, with planes grounded, rail links under water and highways obstructed. The lights are out in large chunks of the US Northeast, Pennsylvania and Maryland. Construction projects are on hold. It all adds up to lost revenues for many shops, auto dealers, restaurants, airlines and couriers, and lost output for offices and factories.

Yet dismal weather isn’t an automatic economic sinkhole. It causes problems, but it can also boost demand in some areas, like outdoor wear, supplies and home heating—not a zero sum effect, but a partial offset. Thanks to the shale boom, natural gas supply is high enough that the added demand isn’t causing prices to run away—they’re up some, but still well below the average since 2000, limiting the impact across the broader economy. Some workers stranded at home can telecommute. US industry still has significant spare capacity, allowing national manufacturers to boost production at factories in unaffected areas to compensate for lost output elsewhere. Orders might pile up while the weather stays nasty, but firms can boost production after the storms pass—and they’ll likely have to, in order to keep pace with demand. The US economy is diverse, dynamic and resilient.

Time and again, history has shown even major environmental disruptions have only a temporary impact. Superstorm Sandy didn’t derail the US expansion in 2012. The US weathered Hurricane Katrina in 2005. The Philippines’ Q4 GDP growth nearly doubled expectations at 1.5% q/q—the second-fastest in Asia—despite Typhoon Haiyan. The Loma Prieta earthquake in October 1989 leveled parts of the San Francisco Bay Area, but it didn’t level the US economy—GDP grew 0.9% Q4 and 4.4% in Q1 1990. Japan went into recession after the Great Tohoku Earthquake and Fukushima Daiichi nuclear disaster, but the recession ended after two quarters—and malaise since then has more to do with Japan’s long-running structural issues. Note, we won’t go so far as to say the storms could be an economic positive, with repairs giving construction a boost—capital spent on repairs is capital might have otherwise been spent elsewhere—but they just aren’t the huge negative many presume. Replacement is no more an economic boon today than it was in 1850, when Frederic Bastiat showed the glazier’s gain in replacing a shopkeeper’s broken window is not a gain to all of the economy.

Even if Q1 growth is noticeably slower, markets are smart enough to discern between temporary weather-related issues and actual fundamental deterioration. Some firms might take a weather-related Q1 earnings hit, but that needn’t extrapolate to weakness in Q2, Q3, Q4 and beyond—it’s a one-time factor. The same fundamentals driving earnings growth throughout this bull market still exist today and looking forward—this, not weather, is a more powerful driver for stocks in the medium to longer term. Markets are forward-looking and incredibly efficient at discounting widely known information and risks. Considering how many people expect nasty weather to chill Q1 economic and earnings data, it’s tough to imagine there being much to take markets by surprise.

So yes, in the short term, it may indeed be tough sledding (pun intended) for some regions and countries. But this isn’t all that different from the short-term external factors that are near-constantly at work in pockets of the world. To markets, over time, it’s largely noise—occasionally distracting, but eventually filtered out. Long-term investors are usually best off doing the same—tuning out the noise and focusing on the longer-term fundamental backdrop.