What Impact Will California Wildfires Have on The Stock Market?
TradingKey - Right now in the US, there are ferocious wildfires that are destroying acres of both land and homes in California. Being spread by strong winds, the fires are also heading towards major urban centres, like Los Angeles.
With 10 people already confirmed dead, in addition to billions of dollars in damages, estimates of the economic toll are starting to come in. It looks set to be one of the country’s worst wildfires, in terms of economic cost, in the 21st century.
So, for investors, what is the likely impact of the wildfires on the US stock market and broader investor sentiment in the weeks and months ahead as authorities battle to contain the fires?
Tens of billions in damage
While there will be varying estimates of the damage inflicted on the state, many analysts are projecting large numbers. According to analysts at JPMorgan, the insured losses from the wildfires in California are expected to top US$20 billion.
That would make them the biggest losses in California history and would surpass the previous record that was set during the 2018 wildfires. However, JPMorgan’s estimate was made earlier and more up-to-date assumptions are pencilling in damages that are significantly higher.
AccuWeather, a private-sector media firm that provides commercial forecasting services, predicts that the wildfires will cause between US$52 billion and US$57 billion worth of damage. The vast amounts of money that could be lost is mainly down to the fact that the wildfires burning around Santa Monica and Malibu are engulfing some of the priciest real estate in all of the US.
Most costly US natural disasters
Sources: NOAA, AccuWeather, Bloomberg
The impact on the stock market?
The most obvious place where investors will see an impact is in the insurance industry. According to JPMorgan, the most exposed publicly-traded insurers to the California region include the likes of Allstate Corp (NYSE: ALL), Travelers Companies Inc (NYSE: TRV), and Chubb Ltd (NYSE: CB).
Smaller, commercial property insurers – like Kinsale Capital (NYSE: KNSL) – could also face some adverse impact from the wildfires.
Beyond that, the utilities sector has already been hit although that has been more contained to power firms that serve the California area.
On Wednesday trading in the US (before the wildfires got worst yesterday and the market shut on Thursday), Edison Internal (NYSE: EIX) – a public electric utility mainly serving the California area – saw its shares plunge over 10%.
Damage picture to become clearer in weeks ahead
Of course, for investors, the picture will only become completely clear once the fires are fully contained and the damage is assessed. Right now, it looks likely to be the worst wildfire in US history in terms of economic cost.
It could also spur more investment in robust infrastructure by US utilities given the increasing frequency of freak weather events like wildfires and hurricanes – particularly in more populous US states such as California and Florida.
Investors will have to parse the fallout in the coming weeks but, perversely, there could also be some potential beneficiaries once the rebuilding process gets under way. These include the likes of home improvement retailers such as Home Depot Inc (NYSE: HD) and Lowe’s Companies Inc (NYSE: LOW).
Overall, it will be insurers and utilities that bear the brunt of the damage in the stock market but the total human and economic cost of the California wildfires is sure to be much higher.
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