Reflecting on the piece I wrote a few weeks ago, reminiscing over the great storm of 1987, it seems Wall Street was better prepared for the events of last week.
Even so, the damage caused by Hurricane Sandy is considerable and significant. Estimates of cost range up to $30 billion, of which insurance companies may have to bear a third. And the infrastructure rebuilding that will be necessary comes at a time when the US is hardly flush with cash.
Moreover, this storm may have influenced the outcome of the Presidential election. As we should know the result by now, it is pointless to speculate on what effect it might have had, but looking at how storms affect markets can be revealing. Sandy is not the costliest natural disaster America has experienced. The bill for Hurricane Katrina in 2005 amounted to more than $40 billion – again because of the flooding involved.
Yet despite the heavy costs, it seems that shares are able to shrug aside these natural catastrophes.
The S&P 500 Index has generally risen after major hurricanes have hit. According to a study by Standard & Poors, this major benchmark gained an average of 3.9 per cent three months after the 13 costliest storms in America. The figure for six months is an increase of 5.8 per cent. Certainly, the immediate effect was muted on markets over there, despite estimates that the storm will cost between 10 and 20 basis points on GDP growth for the fourth quarter as consumer spending is cut back.
It is, if you will excuse the pun, an ill wind but it failed to draw attention away from a positive plethora of Q4 results that emerged last week.
Prominent amongst these were the banks.
If these financial leviathans had one thing in common, Standard & Chartered aside, it was the massive increase in provisions they were making for the compensation due on the mis-selling of PPI.
It happened that last week saw me talking at a couple of the Personal Finance Society’s regional conferences. (I will be at the main conference in Birmingham tomorrow, but that’s another story). My topic was the role of the discretionary fund manager in a post-RDR world. Inevitably the discussion led to the issues of costs, custody and how the industry had changed over the years.
Drawing on my personal experience, I was able to contrast the approach of banks to managing private investor money with that of smaller organisations. Banks, I remarked, were concerned over scalability and reputational risk – both understandable and leading to a more centralised approach to investment decision taking. Yet there appeared little evidence that this produced superior returns, while I cannot think of an industry that has so comprehensively damaged its reputation as banks.
The closer the retail distribution review gets, the less challenging it appears. That is not to say it is not without the odd wrinkle that will doubtless have to be ironed out with the benefit of real experience.
The trouble is that investment is as much art as science, as Fidelity’s Ned Johnson has proved. This makes drafting rules that much more complicated for those charged with protecting the consumer.
As for markets, they remain in good heart – hardly racing away, but nevertheless holding on to the gains made during the summer.
Might this week’s election change things? I doubt it, though the approach taken by Mitt Romney to managing the economy will be very different to that of President Obama. There is probably more of an issue for bond markets if the White House has a new incumbent. We’ll just have to wait and see.
Brian Tora is an associate with investment managers JM Finn & Co